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or [sic] credit or transfer of money by a lender to a borrower is
treated as a separate loan.”9
The subject of netting cross-loans by parties whose
loan/debt relationships are covered by section 7872 is not
addressed by the statute, the conference report or other
legislative history, or by the proposed regulations or their
preamble.
We address the question in three steps: First, we consider
the local law governing the cross-loans; second, we consider the
subject in light of Federal tax principles; and third, for
purposes of completeness, we refer to authorities in other
contexts in which netting has been addressed.
Because petitioners were Alabama residents and the loans
were made in Alabama, we apply Alabama law to determine whether
the overlapping advances should be netted or treated separately
under local law. See United States v. Natl. Bank of Commerce,
472 U.S. 713, 722 (1985); LeFrak v. Commissioner, T.C. Memo.
1993-526.
In Norris v. Commercial Natl. Bank, 163 So. 798, 801 (Ala.
1935), the Supreme Court of Alabama cited Washington v.
9While proposed regulations do constitute “‘a body of
informed judgment * * * which courts may draw on for guidance’”,
KTA-Tator, Inc. v. Commissioner, 108 T.C. 100, 102 (1997)
(quoting Bolton v. Commissioner, 694 F.2d 556, 560 n.10 (9th Cir.
1982), affg. 77 T.C. 104 (1981)), we accord them no more weight
than a litigation position, id. at 102-103; F.W. Woolworth Co. v.
Commissioner, 54 T.C. 1233, 1265-1266 (1970).
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