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include unconstitutional conduct by respondent’s employees, see,
e.g., Riland v. Commissioner, 79 T.C. 185 (1982), and certain
types of illegal income cases, see, e.g., Shriver v.
Commissioner, 85 T.C. 1 (1985). Petitioner does not contend that
respondent’s determination is arbitrary or that unconstitutional
conduct occurred. We agree with respondent and find no reason to
consider respondent’s agent’s pre-deficiency-notice report in
reaching our decision. Respondent’s objection is sustained with
respect to proposed Exhibit 17-P.
II. Section 7872
The primary question for our consideration concerns whether
petitioner must include interest, pursuant to section 7872,
attributable to interest-free loans made to entities (a
corporation and three partnerships) owned in whole or part by its
shareholders. Before the enactment of section 7872, the
Commissioner was generally unsuccessful in attempting to
attribute or impute income from interest-free or below-market
loans.3 See Dean v. Commissioner, 35 T.C. 1083 (1961); Greenspun
v. Commissioner, 72 T.C. 931 (1979), affd. 670 F.2d 123 (9th Cir.
1982); Suttle v. Commissioner, 625 F.2d 1127 (4th Cir. 1980),
affg. T.C. Memo. 1978-393; Martin v. Commissioner, 649 F.2d 1133
3 Respondent, however, was ultimately successful, in a gift
tax context, in situations where below-market loans were made
between family members. See Dickman v. Commissioner, 465 U.S.
330 (1984).
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