Computational Exercise (40 points)

Lisbeth makes the following interest-free loans during the year. The relevant federal interest rate is 5%, and none of the loans are motivated by tax avoidance. All of the loans were outstanding for the last 6 months of the tax year. Identify the federal income tax effects of these loans. Note carefully the tax position on each borrower for which you should clearly identify and include discussions on a) the differences between imputed interest and market interest on gift loans, b) the importance of loans between individual and, c) the tax recognition of interest income.

Borrower	Amount	Borrowers Other Net Investment Income	Purpose of Loan
Richard	$5,000	$800	Gift
Woody	8,000	600	Stock purchase
Irene	105,000	0	Purchase principal residence