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the borrower is treated as a gift, dividend, contribution of
capital, payment of compensation, or other payment depending on
the substance of the transaction. The interest payment is
included in the lender’s income and generally may be deducted by
the borrower. See KTA-Tator, Inc. v. Commissioner, 108 T.C. 100,
102 (1997).
Section 7872 applies to a transaction that is: (1) A “below-
market” loan, and (2) not described in any of certain enumerated
categories. See sec. 7872(c)(1), (e)(1), (f)(8). We discuss the
requirements in turn.
A. Below-Market Loan Requirement
To determine if the below-market loan requirement is
satisfied, we must ascertain whether a transaction is: (1) A
loan, (2) a demand or term loan, and (3) subject to a below-
market interest rate. See sec. 7872(e)(1).
1. Loan Requirement
Respondent contends that petitioners’ advances to Hilltop
were loans. Petitioners contend their advances were capital
contributions.
For purposes of section 7872, any transfer of money that
provides the transferor with a right to repayment, including an
advance, may be a loan. See KTA-Tator, Inc. v. Commissioner,
supra at 103. Petitioners transferred money to Hilltop,
recording the transfers as loans in their personal and corporate
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