- 4 - loan is recharacterized as an arm's-length transaction in which the lender made a loan to the borrower in exchange for a note requiring the payment of interest at the applicable Federal rate. The amount by which the interest which would have been payable on the loan at the applicable Federal rate exceeds the interest payable pursuant to the loan agreement is called "forgone interest". Sec. 7872(e)(2). The forgone interest is treated as: (1) Transferred from the lender to the borrower; and (2) retransferred from the borrower to the lender as interest paid on the loan. Sec. 7872(a)(1)(A) and (B). The first transfer is treated as a gift, dividend, payment of compensation, or other payment to the borrower, depending on the relationship between the lender and the borrower. KTA-Tator, Inc. v. Commissioner, supra at 102. The second transfer is treated as a payment of interest by the borrower to the lender which is includable in the lender's income and deductible by the borrower to the extent allowable under section 163. Id. Petitioners agree that the advances made by KHTC fall within the section 7872(e)(1) definition of a below-market loan. They contend, however, that respondent erred in determining the amounts of the outstanding loans which were subject to section 7872 during the taxable years in issue. They argue that some of the older loans were "unenforceable" during the taxable years in issue by reason of Oregon's statute of limitation for commencing actions upon a liability, effectively exempting such loans from section 7872. Petitioners calculate that the correct amounts ofPage: Previous 1 2 3 4 5 6 7 8 Next
Last modified: May 25, 2011