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Except as provided in regulations, this paragraph shall not
apply to any loan unless substantially level amortization of
such loan (with payments not less frequently than quarterly)
is required over the term of the loan.
Thus, a loan which does not meet the requirement of section
72(p)(2)(C) by requiring substantially level amortization is
treated as a distribution and is included in income under section
72(p)(1)(A).
Respondent argues that a deemed distribution to petitioner
was made in 2000 because petitioner defaulted on the loan in that
year. Specifically, respondent argues that petitioner’s failure
to make the loan payments as required under the terms of the loan
violated the section 72(p)(2)(C) requirement, thereby resulting
in a deemed distribution in the year of the default. In support
of this argument, respondent in his trial memorandum cites the
final regulations issued under section 72(p). However, because
petitioner’s loan was made in June 2000, these regulations do not
apply in this case.3
3The final regulations under sec. 72(p) generally apply only
to loans made on or after Jan. 1, 2002. Sec. 1.72(p)-1, Q&A-
22(b), Income Tax Regs. Under these regulations, when a
participant fails to make payments in accordance with the terms
of a loan, the loan is treated as no longer meeting the sec.
72(p)(2)(C) requirement, thereby resulting in a deemed
distribution. Sec. 1.72(p)-1, Q&A-4(a), Income Tax Regs. The
regulations elaborate on the timing and amount of deemed
distributions resulting from loan defaults as follows:
(a) Timing of deemed distribution. Failure to make any
installment payment when due in accordance with the terms of
the loan violates section 72(p)(2)(C) and, accordingly,
(continued...)
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