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First, the outstanding loan principal could be returned to the
plan, plus the interest the plan would have earned in all of 1994
and the first day of 1995. Respondent determined that the
interest should be 6 percent, the rate historically earned by the
plan. Respondent calculated the outstanding principal plus
interest on the Atascadero loan to be $176,276. Respondent
computed this figure by adding the principal of the Atascadero
loan, $160,701, to the $5,570 outstanding balance of Stephanie’s
1988 loan. The interest on the outstanding amount, as determined
by respondent, was $10,005. The total amount required to be
returned to the plan on January 1, 1995, for correction was
$176,276.
In the alternative, respondent offered to allow petitioner
to take an early deemed distribution of Stephanie and David’s
note on January 1, 1995, and agree to pay a 10-percent additional
tax for an early distribution prior to age 59-1/2 under section
72(t). Respondent determined that the amount of the distribution
should be $176,276, which would have to be reported as income on
petitioner’s 1995 Federal income tax return. The record does not
indicate how respondent calculated the value of the note secured
by the second deed of trust. In exchange for petitioner’s taking
the deemed distribution of the note and paying the section 72(t)
additional tax, respondent agreed that petitioner would not be
liable for any other taxes, interest, or penalties with respect
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