- 12 -
interest to be repaid first on a below-market loan under section
7872.
We think that the provision in section 1.7872-13(c),
Proposed Income Tax Regs., is more appropriately viewed as only
applying to payments of below-market stated interest. In this
context, the parenthetical "if any" makes sense, as there may
well be no stated interest (as in the case at hand). Our
interpretation finds support in an example given later in the
proposed regulations. Section 1.7872-13(d), Example (2),
Proposed Income Tax Regs., 50 Fed. Reg. 33569 (Aug. 20, 1985),
treats partial repayments on an interest-free demand loan as
repayments of principal only, thereby requiring a separate
calculation of forgone interest.
Petitioners next attempt to bootstrap respondent's
adjustments to RSI's interest income and petitioners' itemized
deductions for interest expense under section 7872 (which
petitioners do not contest) into evidence that interest equal to
the AFR was paid in 1987 and 1988 on the loans. Petitioners
ignore the fact that, as the adjustments by respondent were made
after the years in question to reflect what petitioners and RSI
should have reported on their returns, the adjustments cannot
conceivably be relied upon to show that interest was in fact paid
in those amounts.
Petitioners posit that "the Commissioner has already enjoyed
the tax benefits of the interest payments and is now [unjustly]
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Next
Last modified: May 25, 2011