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In the statutory notice of deficiency, respondent determined
that petitioners received and failed to report constructive
dividends from KHTC during 1992, 1993, and 1994 in the amounts of
$12,218, $11,301, and $10,851, respectively. KHTC's Federal
income tax returns reveal that it had ample earnings and profits
during the taxable years in issue to cover the amounts of
constructive dividends determined by respondent. The parties
have stipulated that the determined amounts consist of the
following:
Dividends 1992 1993 1994
Forgone interest
under sec. 7872 $7,984.67 $7,324.29 $8,472.41
Petitioners' personal
expenses paid by KHTC 4,233.00 3,977.00 2,379.00
A. Forgone Interest Under Section 7872
KHTC advanced funds to petitioners before and during the
taxable years in issue. No loan documents were executed with
respect to the advanced funds. There is no evidence that
petitioners were obligated to pay or in fact paid any interest on
the advanced funds. Petitioners repaid some of the advanced
funds before and during the taxable years in issue.
Section 7872 sets forth the income and gift tax treatment
for certain categories of "below-market" loans; i.e., loans that
are interest free or that provide for interest that is lower than
the applicable Federal rate. Sec. 7872(e)(1); KTA-Tator, Inc. v.
Commissioner, 108 T.C. 100, 105 (1997); Mason v. Commissioner,
T.C. Memo. 1997-352. Pursuant to section 7872, a below-market
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