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participant in the year in which the loan proceeds are received.
See Patrick v. Commissioner, T.C. Memo. 1998-30, affd. 181 F.3d
103 (6th Cir. 1999); Prince v. Commissioner, T.C. Memo. 1997-324;
Estate of Gray v. Commissioner, T.C. Memo. 1995-421. Section
72(p)(2), however, provides an exception to this general rule.
Under this exception, a loan is not treated as a taxable
distribution if: (1) The principal amount of the loan (when
added to the outstanding balance of all other loans from the same
plan) does not exceed a specified limit, see sec. 72(p)(2)(A);
(2) the loan, by its terms, must be repaid within 5 years from
the date of its inception or is made to finance the acquisition
of a home which is the principal residence of the participant,
see sec. 72(p)(2)(B); and (3) the loan must have substantially
level amortization with quarterly or more frequent payments
required over the term of the loan, see sec. 72(p)(2)(C).
Respondent argues that the loan at issue did not qualify for
the exception provided by section 72(p)(2). Accordingly,
respondent determined that distribution of the loan proceeds from
the plan constituted a taxable distribution pursuant to section
72(p)(1)(A). Petitioner, on the other hand, contends that the
loan satisfies each requirement of the section 72(p)(2)
exception.
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