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Commissioner, 108 T.C. 100, 102-103 (1997); F.W. Woolworth Co. v.
Commissioner, 54 T.C. 1233, 1265-1266 (1970).
The Commissioner proposed section 1.7872-2, Proposed Income
Tax Regs., supra, in 1985, and has never adopted it in final
form. The Commissioner has since asserted that section 7872 can
apply to loans given in consideration for the sale or exchange of
property, in both Frazee v. Commissioner, supra, and the case at
hand. Moreover, our acceptance in Frazee of the Commissioner’s
position that section 7872 applied to the intrafamily note
necessarily rejected the position taken in the proposed
regulation.
For all these reasons, consistent with our decision in
Frazee, we hold that the deferred payment arrangement may be a
below-market loan subject to section 7872, even though no part of
the sales price would be treated as interest or OID under
sections 483 and 1274.90
90The Court of Appeals for the Seventh Circuit held, in
Ballard v. Commissioner, 854 F.2d 185 (7th Cir. 1988), revg. T.C.
Memo. 1987-128, that a note should have no gift tax consequences
where it stated interest at the “safe harbor” rate referred to by
sec. 483 and no portion of the note’s stated principal amount
would be recharacterized as interest for that reason. In
Krabbenhoft v. Commissioner, 94 T.C. 887 (1990), affd. 939 F.2d
529 (8th Cir. 1991), we reconsidered our position on the
relevance of sec. 483 for gift tax purposes in light of the
reversal of our Ballard decision, and decided not to follow that
reversal except where required by the Golsen rule (see Golsen v.
Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir.
1971)). Moreover, the Court of Appeals for the Tenth Circuit, to
which an appeal of this case would lie, has agreed with our view,
(continued...)
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