Milo G. and Sarah E. Chapman, et al. - Page 15

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            that the series of loans was not bona fide.7  The effect of                                  
            petitioners' recharacterization would be to relieve the Chapmans                             
            and the Christies of any income tax consequences flowing from the                            
            loans.  In addition, petitioners seek to characterize the excess                             
            interest payments made by the corporations to or on behalf of                                
            Milo Chapman and David Christie as bookkeeping errors subject to                             
            correction pursuant to section 4975(f)(5).                                                   

                  Person.--There is hereby imposed a tax on each                                         
                  prohibited transaction.  The rate of tax shall be equal                                
                  to 5 percent of the amount involved with respect to the                                
                  prohibited transaction for each year (or part thereof)                                 
                  in the taxable period.  The tax imposed by this                                        
                  subsection shall be paid by any disqualified person who                                
                  participates in the prohibited transaction (other than                                 
                  a fiduciary acting only as such).                                                      
            Sec. 4975(b) imposes an additional excise tax on the prohibited                              
            transaction equal to 100 percent of the amount involved if the                               
            transaction is not timely corrected.  The prohibited transactions                            
            enumerated in sec. 4975� were designed to guard against over-                                
            reaching by persons able to exert influence over the affairs of                              
            the plan.  A prohibited transaction includes, inter alia, any                                
            direct or indirect lending of money or other extension of credit                             
            between a plan and a disqualified person.  Sec. 4975(c)(1)(B).                               
            Disqualified persons are defined in terms of certain                                         
            relationships a person has with a plan.  Sec. 4975(e)(2).  Those                             
            relationships include, inter alia, fiduciary, sec. 4975(e)(2)(A);                            
            an employer whose employees are covered by the plan, sec.                                    
            4975(e)(2)(C); an owner of 50 percent or more of a corporation                               
            any of whose employees are covered by the plan, sec.                                         
            4975(e)(2)(E); a member of the family of any individual described                            
            within certain paragraphs in sec. 4975(e)(2), sec. 4975(e)(2)(F);                            
            and any officer or director of a corporation which, among other                              
            things, has employees covered by the plan, sec. 4975(e)(2)(H).                               
                  7The parties stipulated that the Plan was a profit-sharing                             
            plan, and neither party disputed that the Plan was a qualified                               
            plan for purposes of sec. 401 or a qualified employer plan for                               
            purposes of sec. 72(p).                                                                      

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