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to avoid section 7872. In so arguing, petitioners ignore the
language of section 1.7872-3(c)(1), Proposed Income Tax Regs., 50
Fed. Reg. 33559 (Aug. 20, 1985), which provides that "Section
7872 does not apply to any loan which has sufficient stated
interest." (Emphasis added.) In any event, no evidence
demonstrates that any interest was actually paid in 1987 and
1988. Indeed, all evidence points to the contrary. No interest
income was shown on RSI's Forms 1120, nor was any interest
expense reflected on petitioners' returns for the years at issue.
Also telling is the fact that both petitioners' and RSI's
financial ledgers indicate that all payments by petitioners to
RSI reduced the outstanding principal of the loans dollar-for-
dollar by the amount of the payments.
Furthermore, petitioners ignore the parenthetical language
"if any" emphasized above. Petitioners theorize that the words
"unpaid interest" refer to imputed interest computed at the AFR
under section 7872, and thus assert that all repayments should be
treated first as payments of such interest by the borrower. In
that connection, petitioners posit, without pointing to any
authority, that section 7872 applies only in the narrow
circumstance where a taxpayer learns after the end of the
relevant tax year that his repayments are insufficient to satisfy
first all of the interest owing at the AFR. However, if
petitioners' interpretation were correct, the parenthetical
language "if any" would be superfluous, as there would always be
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