- 12 - 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.Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12
Last modified: May 25, 2011