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Below-Market Loans
During petitioners’ 1997 tax year, ATV and Mr. Cutts had
open-account indebtedness to each other. No interest was paid or
accrued on amounts due ATV from Mr. Cutts or on amounts due Mr.
Cutts from ATV. During preparation for trial, ATV and respondent
prepared separate general ledgers (the ledgers) to show the
respective amounts of debt between ATV and Mr. Cutts and the
amount or amounts of imputed interest under section 7872.3
For petitioners’ 1997 tax year, the ledgers included a
“receivable from shareholder” account for amounts due ATV from
Mr. Cutts and a “payable to shareholder” account for amounts due
Mr. Cutts from ATV. At all relevant times, Mr. Cutts’s debt to
ATV exceeded ATV’s debt to Mr. Cutts. On his 1997 return, Mr.
Cutts did not deduct from his $78,000 Landmark Hall rent income
any of the debt that he owed ATV or that ATV owed him.
In ATV’s ledger, at the end of each month of 1997, the
respective debts between ATV and Mr. Cutts are netted out, and
interest at the applicable Federal rate (APR) is applied to the
balance. In respondent’s ledger, the column of debt from Mr.
Cutts to ATV is maintained separately from the column of debt
from ATV to Mr. Cutts, and interest at the APR is computed on the
separate monthly balances.
3There are small discrepancies in the debt amounts recorded
in ATV’s and respondent’s ledgers; those discrepancies should be
reconciled by the parties in the Rule 155 computation.
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Last modified: May 25, 2011