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loan, by its terms, must be repaid within 5 years from the date
of its inception or is made to finance the acquisition of a home
which is the principal residence of the participant; and (3) the
loan must have substantially level amortization with quarterly or
more frequent payments required over the term of the loan.
Section 72(p)(2) applies only to distributions that are intended
to be loans.
Respondent argues that the transfers from the Plan were
taxable distributions and not loans. In support, respondent
cites the following factors: In all cases in which the notes
were signed, the notes were signed well after the transfers were
made; petitioners presented no evidence, other than copies of the
notes, that the Plan, the Plan administrator, the Plan trustee,
or petitioners maintained any records reflecting the transfers as
loans; any repayments on the notes, if in fact made, were
insignificant; there was at no time a demand for repayment and no
steps were taken to enforce the notes; neither petitioner had the
ability to repay the transferred funds; and the notes were
between related parties and the form of the transaction should
not be honored where it lacks economic reality. In response,
petitioners argue that sufficient "indicia of debt" are present
to justify characterizing the transfers as loans.
A transfer of money will be characterized as a loan for
Federal income tax purposes where "'at the time the funds were
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