Clayton W. Plotkin - Page 10




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               2.   Substantially Level Amortization                                  
               In order for a loan to qualify for the section 72(p)(2)                
          exception to taxable distribution treatment, the loan must                  
          provide for substantially level amortization over its term.  See            
          sec. 72(p)(2)(C).  The substantially level amortization                     
          requirement under section 72(p)(2)(C) has been interpreted as               
          requiring that payment of principal and interest be made in                 
          substantially level amounts over the term of the loan.  See                 
          Estate of Gray v. Commissioner, T.C. Memo. 1995-421.  If we treat           
          the promissory note as requiring a balloon payment in the fifth             
          year, then the promissory note would call for 59 monthly payments           
          of $253.57 and a final balloon payment of $20,119.89.  The                  
          balloon payment is more than 79 times larger than the regular               
          monthly payment, and more than 80 percent of the initial                    
          principal balance.  From a textual standpoint, these payments               
          simply cannot be characterized as substantially level.  From a              
          policy standpoint, one of the stated purposes behind the                    
          enactment of section 72(p)(2)(C) was to prevent taxpayers from              
          currently enjoying plan assets through the use of balloon payment           
          loans:                                                                      
                    The rules governing the tax treatment of loans                    
               from certain tax-favored plans are intended to limit                   
               the extent to which an employee may currently use                      
               assets held by a plan for nonretirement purposes and to                
               ensure that loans are actually repaid within a                         
               reasonable period.  However, there is concern that the                 
               present rules do not prevent an employee from                          
               effectively maintaining a permanent outstanding $50,000                





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