1. Alice Kemper is the sole shareholder in a closely held business. She sold her business to her key employee, Tom, in return for an agreement to pay an annunity as long as she lives. At Alice’s death, Tom’s basis in the business is equal to the

a.   Fair market value of the business on the date Alice died

b.   Amount of annuity payments made during Alice’s lifetime

c.   Present value of payments to be made over Alice’s expected lifespan when the agreement was made

d.   Future value of payments to be made over Alice’s expected lifespan when the agreement was made

2. Mr. Jones receives a demand loan from his employer, Doors and Things, of $100,000. He pays $2,000 of interest on the loan for a particular year. If he had paid market interest on the loan, he would have paid $5,000. How much taxable income will Mr. Jones be considered to receive because of this transaction?

a.   $0

b.   $2,000

c.   $3,000

d.   $5,000