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formula prices to reflect the financial performance of the True
companies during that period.
For all these reasons, we conclude that the deferred payment
arrangement was not a transaction in the ordinary course of
business and was therefore a gift loan.
V. Amounts of the Gifts–-Application of Section 7872
We have just concluded that for purposes of section 7872,
the deferred payment arrangement was a term loan and a gift loan.
Section 7872 treats the lender of a gift term loan as having
transferred to the borrower, on the date the loan is made, a cash
gift in an amount equal to the excess of: (1) The “amount
loaned”, over (2) the present value of all payments required to
be made under the loan, discounted at the applicable Federal
rate. See sec. 7872(b)(1), (d)(2), (f)(1).
It is not entirely clear how this provision should be
applied to the case at hand. The buy-sell agreements required
payment to be made within 6 months of the notice dates.
Therefore, as of the notice dates, the deferred payment
arrangement could have been considered to be a 6-month loan,
prepayable without penalty.91
91We note that certain proposed sec. 7872 regulations state
that an option to prepay should be disregarded in determining the
term of a loan. See sec. 1.7872-10, Proposed Income Tax Regs.,
50 Fed. Reg. 33553, 33566 (Aug. 20, 1985).
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