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must have substantially level amortization with quarterly or more
frequent payments required over the term of the loan, sec.
72(p)(2)(C).
Petitioners contend that the $19,620 distribution was not
taxable in 2000.3 Respondent argues that section 72(p) and the
final regulation thereunder support the conclusion that Mr.
Molina received the $19,620 distribution from the retirement plan
in 2000.
Under the 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 section 72(p)(2)(C) requirement,
thereby resulting in a deemed distribution. Sec. 1.72(p)-1, Q&A-
4, Income Tax Regs. Such a deemed distribution occurs at the
time the installment payment was due but not made and equals the
entire outstanding balance of the loan at the time of such
failure. Sec. 1.72(p)-1, Q&A-10, Income Tax Regs. The 1998
loan, however, was made before the effective date of this
regulation. Sec. 1.72(p)-1, Q&A-22, Income Tax Regs.
3 In his reply brief, respondent argues that petitioners
raised this argument for the first time on brief. Respondent’s
argument is without merit. Petitioners raised this argument in
the May 2002 letter which they attached to their OIC, the hearing
request, and the petition. Furthermore, at the calendar call, a
colloquy between petitioners and the Court made it clear that
petitioners contended that 2000 was the incorrect year for taxing
the $19,620 distribution from the retirement plan. Petitioners
stated that they had asserted this “from the beginning”.
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