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loan balance through the use of balloon repayment
obligations * * * from third parties. [H. Rept. 99-
426, at 735 (1985), 1986-3 C.B. (Vol. 2) 1, 735; S.
Rept. 99-313, at 618 (1986) 1986-3 C.B. (Vol. 3) 1,
618; Emphasis added.]
Accordingly, we hold that the balloon payment provision which
petitioner requests we incorporate into the promissory note would
cause the loan to violate the requirements of section
72(p)(2)(C).
3. Conclusion as to Section 72(p)
If we were to interpret the promissory note according to its
express provisions, then petitioner’s loan would violate the 5-
year repayment requirement of section 72(b)(2)(B)(i). If we
incorporate into the promissory note a provision calling for a
balloon payment at the end of the fifth year of the loan, then
the loan fails to provide for substantially level amortization as
required by section 72(b)(2)(C). Thus, under either possible
interpretation of the promissory note, petitioner’s loan fails to
qualify for the section 72(p)(2) exception. The loan therefore
constitutes a taxable distribution pursuant to section
72(p)(1)(A).
B. Tax on Early Distributions
Section 72(t)(1) provides for a 10-percent additional tax on
early distributions from a qualified pension plan. See Chapman
v. Commissioner, T.C. Memo. 1997-147. Section 72(t)(2) sets
forth specific exemptions. Petitioner does not argue that any of
the statutory exceptions applies to him. Accordingly, we sustain
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