Requirement #4

Stock in Boland Corporation (555 Pinewood Lane, Duncan, AL 73336) is held equally by Linda, Lester, and John. Boland seeks additional capital in the amount of $900,000 to construct a building. Linda, Lester, and John each propose to lend Boland Corporation $300,000, taking from Boland a $300,000 four-year note with interest payable annually at two points below the prime rate. Boland Corporation has current taxable income of $2 million. You represent Boland Corporation. Boland's president, Frank Conner, asks you how the payments on the notes might be treated for tax purposes.