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applicable Federal rate (AFR) as determined under section
1274(d). See sec. 7872(e)(1)(A). Petitioners made loans to
Hilltop, and Hilltop did not pay interest on these loans.
Therefore, we conclude that the loans are below-market demand
loans.
B. Enumerated Category Requirement
Section 7872(f)(8) provides that section 7872 shall not
apply to any loan to which any of certain enumerated sections
applies. None of the enumerated sections applies to petitioners’
loans. Therefore, we conclude that the enumerated category
requirement is met, and section 7872 applies to petitioners’
loans.
Accordingly, we hold that petitioners, pursuant to section
7872, have interest income from below-market loans they made to
Hilltop. Petitioners contend, but have not established, that the
loans should be deducted, pursuant to section 166, as bad debts.
II. Deductibility of Prepaid Taxes
Section 164(a)(1) allows a deduction for real property
taxes. Deduction of prepaid real property taxes has been
disallowed where a cash basis taxpayer failed to establish that
the prepayment represented assessed, rather than estimated,
taxes, and that such taxes were due in the year they were paid.
See Hradesky v. Commissioner, 540 F.2d 821 (5th Cir. 1976), affg.
per curiam 65 T.C. 87 (1975). Petitioners have not established
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