Frank, Cora and Mitch are equal shareholders in Purple Corporation. The corporation's assets have a tax basis of $50,000 and a fair market value of $600,000. In the current year, Frank and Cora each loan Purple Corporation $150,000. The notes to Frank and Cora bear an interest of 8% per annum. Mitch leases the equipment to Purple Corporation for an annual rental of $12,000. Discuss whether the shareholder loans from Frank and Cora might be reclassified as equity. Consider your discussion whether Purple Corporation has an acceptable debt-equity ratio.

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