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deemed transfer from the corporation to the shareholder is
treated as a distribution, which generally is taxed as a dividend
to the shareholder. Secs. 61(a)(7), 301(c)(1); H. Conf. Rept.
98-861, supra at 1013, 1984-3 C.B. at 267. The shareholder
generally may deduct the deemed interest payment to the
corporation. H. Conf. Rept. 98-861, supra at 1013, 1984-3 C.B.
at 266. The shareholder's income from the deemed dividend and
the shareholder's deduction for the deemed payment of interest
may offset each other within the meaning of the temporary
regulation. The corporation, on the other hand, is subject to
tax on the foregone interest but is not entitled to a deduction
for the deemed distribution it made to the shareholder.
Therefore, it has no deduction to offset the interest income from
the loan. Similarly, petitioner has interest income but is not
entitled to a deduction for the deemed distribution it made to
the Tators. As a result, petitioner's reliance on the exception
is misplaced.
Accordingly, we hold that petitioner, pursuant to section
7872, has interest income from below-market loans it made to its
shareholders.
To reflect the foregoing,
Decision will be entered
for respondent.
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Last modified: May 25, 2011