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the demand of the lender is a factual one. Loans between closely
held corporations and their controlling shareholders are subject
to special scrutiny. Electric & Neon, Inc. v. Commissioner, 56
T.C. 1324, 1339 (1971), affd. without published opinion 496 F.2d
876 (5th Cir. 1974).
In the instant case, RSI made loans without written
repayment terms to its only shareholders and had unfettered
discretion to determine when the loans would be repaid. On that
basis, we conclude that the loans are demand loans. We reached
the same conclusion on similar facts in KTA-Tator, Inc. v.
Commissioner, supra at 104-105.
Next, we must determine whether the loans were subject to a
below-market interest rate. A demand loan is a below-market loan
if it is interest free, or if it provides for interest at a rate
that is lower than the AFR as determined under section 1274(d).
Sec. 7872(e)(1)(A), (f)(2)(B). If a demand loan is classified as
a below-market loan, the lender has interest income (forgone
interest) equal to the difference between (1) The interest that
would have accrued on the loan using the AFR as the interest
rate; and (2) any interest actually payable on the loan. Sec.
7872(e)(2); KTA-Tator, Inc. v. Commissioner, supra at 105. The
parties are treated as though, on the last day of each calendar
year, the lender transferred an amount equal to the forgone
interest to the borrower and the borrower repaid this amount as
interest to the lender. Sec. 7872(a). In the context of a loan
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