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regulations, indirect loans are treated as from the lender to the
indirect participant and then to the borrower.8 That is one
logical method to determine the effect of the below-market loans
on all the participants and to treat direct and indirect loans
similarly. In this setting, the loans are being made by a
family-owned corporation indirectly to shareholders through
family-owned entities. The ability to make such loans depends on
petitioner’s shareholder(s), and so the whole amount of the loan
is first attributable to the shareholders’ relationship with the
lender. After that point, the flow from the lender’s
shareholders to others, whether partners, nonshareholders, or
some other relationship, would be subject to section 7872 only if
that transaction came within the statutory ambit. The effect and
handling of any separately hypothecated loans after those
considered to the lender’s shareholders present a more complex
question that would be better addressed in regulations and is one
we need not address here.
We recognize that there could be some questions about the
amount of any dividend to the shareholder(s) in an indirect loan
situation, especially where the borrowing entity does not
8 The proposed regulation restructures indirect loans into
separate loans as follows: “(i) A deemed below-market loan made
by the named lender to the indirect participant; and (ii) A
deemed below-market loan made by the indirect participant to the
borrower.” Sec. 1.7872-4(g)(1)(i) and (ii), Proposed Income Tax
Regs., 50 Fed. Reg. 35561 (Aug. 20, 1985).
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