Stock in Sweater Corporation is held equally by Jan, Lisa, and Will. Sweater Corporation seeks additional capital in the amount of $1,200,000 to construct a building. Jan, Lisa, and Will each propose to lend Sweater Corporation $400,000, taking from Sweater Corporation a $400,000 four-year note with interest payable annually at two points below the prime rate. Sweater Corporation has current taxable income of $3,200,000. You represent Sweater Corporation. Sweater Corporations president, Priscilla Potts, asks you how the payments on the notes might be treated for tax purposes.

Provide a detailed explanation noting a minimum of five relevant factors that provide guidance toward resolving this capitalization issue.