CCPC Ltd., per Example Problem 19-12, attempts to circumvent the income inclusion under the deemed interest rules by investing the $100,000 in share capital of another corporation, Bermuda Inc., owned by Harold Chui, instead of making a direct loan to USCO Inc. Bermuda Inc. loans the funds interest-free to USCO Inc. The loan is outstanding for more than a year.

REQUIRED

What are the income tax consequences of this plan? Assume a prescribed interest rate of 2%.

Data in From Example Problem 19-12

Harold Chui is the sole shareholder of CCPC Ltd. and of USCO Inc. CCPC Ltd. has advanced USCO Inc. $100,000 to assist in financing its relatively new operations in Port Huron, Michigan. USCO Inc. does not pay any interest to CCPC Ltd. on this indebtedness, which has been outstanding for more than a year.