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(5th Cir. 1981); Beaton v. Commissioner, 664 F.2d 315 (1st Cir.
1981), affg. T.C. Memo. 1980-413.
Congress, in 1984, addressed these and other related
concepts by enacting section 7872. See Deficit Reduction Act of
1984, Pub. L. 98-369, sec. 172(a), 98 Stat. 699. That section
concerns the subject of “below-market loans” in several contexts,
including those between family members, partnership/partner,
employer/employee, corporation/shareholder, and other related-
party categories. We described the general effect of section
7872 in KTA-Tator, Inc. v. Commissioner, 108 T.C. 100, 101-102
(1997), as follows:
Section 7872 sets forth the income and gift tax
treatment for certain categories of “below market”
loans (i.e., loans subject to a below-market interest
rate). Section 7872 recharacterizes a below-market
loan 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 a statutory rate.
As a result, the parties are treated as if the lender
made a transfer of funds to the borrower, and the
borrower used these funds to pay interest to the
lender. The transfer to 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 H. Conf. Rept. 98-861,
at 1015 (1984), 1984-3 C.B. (Vol. 2) 1, 269; Staff of
Joint Comm. on Taxation, General Explanation of the
Revenue Provisions of the Deficit Reduction Act of
1984, at 528-529 (J. Comm. Print 1984).
Petitioner advances several arguments in support of its
overall contention that the loans it made do not come within the
provisions of section 7872. Petitioner contends that it has
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