French E. Hickman and Janice C. Hickman - Page 20

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               note to be altered to correct prohibited transactions.                 
               The modification of the original note is evidenced by                  
               the amount of interest that was paid to correct the                    
               prohibited transactions.  Interest on the original note                
               was "at the rate of 15 percent per annum, payable                      
               annually." * * * Interest paid in connection with the                  
               correction of the prohibited transactions was "interest                
               at fifteen percent (15%) simple and nine percent (9%)                  
               compounded annually on the fifteen percent (15%) simple                
               interest." * * * The modification of the loan to cor-                  
               rect the prohibited transaction requires the applica-                  
               tion of I.R.C. � 72(p)(3) to determine the nature of                   
               the interest paid during 1991.  The interest is simply                 
               not deductible pursuant to I.R.C. � 72(p)(3).                          
               On the record before us, we find that respondent has failed            
          to establish that the 1991 settlement modified the 1982 plan loan           
          within the meaning of the 1986 Act effective date provisions.               
          The 1982 note provided that interest on the 1982 plan loan was to           
          be paid annually at the rate of 15 percent per year, and the 1991           
          settlement provided for "repayment of the outstanding [1982 plan]           
          loan balance, principal plus interest," consisting of 15-percent            
          simple interest and 9-percent interest compounded annually on the           
          15-percent simple interest.  However, the provision in the 1991             
          settlement for 9-percent compound interest did not modify the               
          terms of the 1982 plan loan or the 1982 note evidencing that                
          loan; it merely effected the correction of the "prohibited" 1982            
          plan loan, which the parties to the 1991 settlement agreed was              
          required by section 4975(f)(5), by                                          
               undoing the transaction [the 1982 plan loan] to the                    
               extent possible, but in any case placing the [Hickman                  
               corporation profit-sharing] plan in a financial posi-                  
               tion not worse than that in which it would be if the                   





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