§7872 — Treatment of loans with below-market interest rates

We find this case inapposite here.

7872, and respondent concedes the remainder, $1,298,457, ofthe imputed interest set forth in the notice ofdeficiency. Respondent concedes that the sec. 6662(a) accuracy-relatedpenalty does not apply to the underpayment oftax caused by petitioner's failure to recognize imputed interest under sec.

KTA-Tator, Inc., is distinguishable from this case and does not address whether overlapping loans should be netted.

KTA-Tator, Inc., is distinguishable from this case and does not address whether overlapping loans should be netted.

7872, I.R.C. The “indirect” loans were to entities owned in part by C’s shareholders. C contends that sec. 7872, I.R.C., was not intended to apply to a loan by C to a shareholder of C who does not have a majority or controlling interest in C. C also contends that sec. 7872, I.R.C., does not apply to a loan by C to an entity in which no shareholder of C individually holds a controlling or majority interest.

However, we do not agree with respondent that the 2004 Schedule L shows the correct amount of loans to Mr.

We hold, therefore, that the payments from PPP to petitioner in 1995 and 1996 were constructive dividends and are taxable, to the extent of earnings and profits, as ordinary income.

The issue for decision is whether petitioner, pursuant to section 7872, has interest income from loans it made to its shareholders.

. . . . . . . . . . . . . . . . . . . . . . . . . . 297 I. Summary of Arguments . . . . . . . . . . . . . . . 297 II. Jean True’s Sales Were Completed on Notice Dates . 300 III. Sections 483 and 1274 Do Not Prevent Below-Market Loan Treatment Under Section 7872 . . . . . . . 308 IV. Deferred Payment Arrangements Are Below-Market Gift Loans Subject to Section 7872 . . . . . . . 313 A. Loan . . . . . . . . . . . . . . . . . . . . . 313 B. Below-Market Loan . . . . . . . . . . . . . . . 314 C. Gif

. . . . . . . . . . . . . . . . . . . . . . . . . . 297 I. Summary of Arguments . . . . . . . . . . . . . . . 297 II. Jean True’s Sales Were Completed on Notice Dates . 300 III. Sections 483 and 1274 Do Not Prevent Below-Market Loan Treatment Under Section 7872 . . . . . . . 308 IV. Deferred Payment Arrangements Are Below-Market Gift Loans Subject to Section 7872 . . . . . . . 313 A. Loan . . . . . . . . . . . . . . . . . . . . . 313 B. Below-Market Loan . . . . . . . . . . . . . . . 314 C. Gif

eductions of principal on the financial ledgers of both Ps and the corporation. R determined that Ps were the recipients of below- market loans from the corporation and, among other things, adjusted their income to reflect distributions pursuant to sec. 7872, I.R.C. Held: Ps have dividend income in an amount equal to the forgone interest from the below-market demand loans. KTA-Tator, Inc. v. Commissioner, 108 T.C. 100, 106-107 (1997), applied. Held, further, additions to tax under sec. 6661, - 2

t fee deductions lof $4,175,000, $4,800,000, and $4,595,000 for 2002, 2003, and 2004, respectively, (2) whether Weekend Warrior is entitled to depreciation deductions with respect to the airplane and the Nordic boat (boat), (3) whether Weekend Warrior is entitled to airplane expense deductions, (4) whether Weekend Warrior has interest income under section 7872 from loans to Mark E.

After concessions, the issues are whether petitioners: (1) Have interest income, pursuant to section 7872, from loans made to their controlled corporation; and (2) are entitled to deduct, on their 1996 tax return, 1997 real property taxes.

encies in petitioner’s taxable years ended August 31, 1994 and 1995, in the amounts of $19,094 and $16,944, respectively. The deficiencies are attributable to respondent’s determination that petitioner made “below-market loans” within the meaning of section 7872. More particularly, we consider a question of first impression of whether the provisions of section 7872 apply where petitioner makes loans to its shareholders and to entities owned in part by its shareholders and in part by other member

The issue for decision is whether petitioner, pursuant to section 7872, has interest income from loans it made to its shareholders.

ioners also argue (with regard to the $325,939 that was used by YOC in 1986 for the purchase of real property on which to locate the new Chrysler-Plymouth dealership to be owned by NRDC) that the $325,939 represented a loan by YOC to NRDC and was 2 Sec. 7872 requires interest income to be imputed to a taxpayer in certain circumstances involving loans with below market interest rates. - 39 - incorrectly reflected as an increase in the outstanding balance of the YOC-Elvin Account. Petitioners also

e that was valued at less than the fair market value ofthat income interest, respondent also determined (below-market-loangift determination) that each ofthe notes bore a below-market interest rate and therefore constituted a below-market loan under sec. 7872. Petitioner claims that the notes did not constitute below-market loans because those notes "used the December 2003 short-term federal rate of 1.68% per annum". There is no evidence in the record that establishes the rate at which each ofth

pay by yearend. Moreover, it is not clear whether such a binding obligation must be in the form ofa debt instrument either bearing arm's-length interest, or, ifno (or too little) interest is provided for, governed by the interest imputation rules ofsection 7872. There is no need to opine on those issues because none ofthe circumstances described in section 31.6205-1(c)(4), EmploymentTax Regs., is present in this case.8 8It is orily during the limited period in which an employer may seek reimbur

On its consolidated income tax return for 1990, PKV&S reported that PK Ventures had imputed interest payments from PKVI LP under section 7872 totaling $67,772.

It is also clear that the right to use borrowed money is interrelated with its corresponding interest cost. Interest represents the cost of using borrowed money. See, e.g., Snyder v. Commissioner, 93 T.C. 529, 546 (1989). For example, in Albertson’s, Inc. v. Commissioner, 95 T.C. 415, 421 (1990), affd. 42 F.3d 537 (9th Cir. 1994), we sta

6663(a) 1990 $64,392 $48,294.00 1991 75,726 56,794.50 Respondent further determined in the notice that petitioner has imputed interest income for 1990 and 1991 under section 7872 of $7,089 and $7,670, respectively, as a result of the forgone - 9 - interest on Mr.

6663(a) 1990 $69,655 $17,642.85 $52,241.25 1991 109,700 10,973.21 82,275.00 Respondent further determined in the notice that petitioner has imputed dividend income for 1990 and 1991 under section 7872 of $7,089 and $7,670, respectively, as a result of the forgone interest on petitioner’s outstanding loan balances with Duncan & Associates during those respective years.

It is also clear that the right to use borrowed money is interrelated with its corresponding interest cost. Interest represents the cost of using borrowed money. See, e.g., Snyder v. Commissioner, 93 T.C. 529, 546 (1989). For example, in Albertson’s, Inc. v. Commissioner, 95 T.C. 415, 421 (1990), affd. 42 F.3d 537 (9th Cir. 1994), we sta

rate well above the applicable Federal rate.2 See 2In January 1990, when Stephanie and David received the first disbursement of funds, the applicable Federal rate was 7.90 percent for short-term loans with an annual period of (continued...) - 21 - sec. 7872. In addition, petitioner testified that he viewed the Atascadero loan as an investment for his profit-sharing plan. Stephanie testified that the funds were loans, and that she had always intended to repay the amounts borrowed. We found petit

es, Inc. (Crestmark) is entitled to a deduction for business expenses claimed on its corporate income tax return for the year ended July 31, 1994.1 1 Respondent determined that Crestmark should have included in taxable income interest imputed under sec. 7872 on the unpaid balance of certain loans that Crestmark made to petitioners. Respondent also asserted an addition to tax against Crestmark for failure to file a timely return. Petitioners failed to present any evidence with regard to these iss

es, Inc. (Crestmark) is entitled to a deduction for business expenses claimed on its corporate income tax return for the year ended July 31, 1994.1 1 Respondent determined that Crestmark should have included in taxable income interest imputed under sec. 7872 on the unpaid balance of certain loans that Crestmark made to petitioners. Respondent also asserted an addition to tax against Crestmark for failure to file a timely return. Petitioners failed to present any evidence with regard to these iss