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1. Repayment Term
We begin with the repayment term of petitioner’s loan. In
order for a loan to be excepted from being treated as a taxable
distribution under section 72(p)(1)(A), the loan generally must
require, by its terms, repayment within 5 years.5 See sec.
72(p)(2)(B)(i). With respect to repayment provisions, the
promissory note executed by petitioner called for monthly
payments of $253.57. At the 9 percent rate of annual interest
stated in the note, satisfaction of the loan would not have
occurred until the fifteenth year of the loan. Respondent points
out that the loan, by its terms, did not require repayment within
5 years. Accordingly, respondent argues that the loan failed to
satisfy section 72(p)(2)(B)(i).
Petitioner concedes that the promissory note, as drafted,
omitted the 5-year repayment provision. Petitioner testified
that he intended the promissory note to contain a provision
calling for a balloon payment at the end of the fifth year of the
loan to satisfy the then outstanding principal balance, and that
the omission of such provision was a product of a drafting
mistake on his part. In support of his testimony, petitioner
5 While an exception exists for loans the proceeds of which
are used to purchase a principal residence, see sec.
72(p)(2)(B)(ii), the proceeds of the loan which petitioner took
from the plan were not used by petitioner for this purpose.
Accordingly, the exception to the 5-year repayment term
requirement does not apply in this case.
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