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Yorkville building but disallowed the interest expense claimed by
petitioners.
Prior to and continuing through the relevant taxable years,
the corporation maintained the Douglas R. Prince, D.D.S., M.S.,
P.C. Pension Plan and Trust (the pension plan), in which
petitioner was a participant. The pension plan was a qualified
trust within the meaning of section 401(a).
On or about March 14, 1986, the pension plan made a loan in
the amount of $50,000 to petitioner (the original loan). The
original loan, which was secured by petitioner's vested benefit
in the pension plan, was to be repaid on April 1, 1988, with
interest at the rate of 13.75 percent per annum. On the due date
of the original loan, the principal and interest on the original
loan were not paid but were instead rolled over into a new loan
(the renewed loan). Neither the original loan nor the renewed
loan contained a provision for "level amortization" of the
principal. At all relevant times, the present value of one-half
of petitioner's "accrued benefit" under the pension plan exceeded
$100,000.
Petitioners did not include the original loan or the renewed
loan in their gross income on their Federal income tax returns
for the years in issue. Respondent determined that the renewed
loan did not provide for "level amortization" as required by
section 72(p)(2)(C) and concluded that the renewed loan did not
qualify for the section 72(p)(2)(A) exception. Consequently,
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