Estate of Frederick R. Hoffman - Page 6




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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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