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some other type of payment, depending on the substance of the
transaction. Accordingly, there would be no lack of continuity
where an indirect below-market loan was made by a corporation to
an entity that was owned by the lender’s shareholders and
nonshareholders of the borrowing corporation.
In that same vein, respondent contends that there is no
statutory prerequisite that a corresponding or correlative
adjustment be made to the tax of a hypothetical borrower before
making an adjustment to the tax of the lender. Although
respondent states that he is able to determine an adjustment with
respect to petitioner’s shareholders, he contends that his
failure to do so would not necessarily preclude a determination
with respect to petitioner’s taxes. In support of this
contention, respondent relies on an explanation in KTA-Tator,
Inc. v. Commissioner, 108 T.C. at 106-107, that dividend income
determined by the Commissioner may be offset by the shareholder’s
interest deductions, but the lending corporation would not be
entitled to a corresponding deduction attributable to the deemed
dividend distribution against its imputed interest income.
Although the holding of KTA-Tator, Inc. has no direct bearing on
the questions involving “indirect” loans, the discussion in that
case illustrates that one party to a below-market loan may end up
with a tax liability, and the other may incur no net tax effect.
That, however, does not specifically focus on the question of
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