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Although a loan may initially satisfy the requirements of
section 72(p)(2)(A) at the time that it is made, a deemed
distribution may nevertheless occur subsequently because of the
failure to repay the loan consistent with the loan agreement,
e.g., because of the failure to amortize the loan on a
substantially level basis. Sec. 72(p)(2)(C). Accordingly, if a
default occurs, a distribution is deemed to occur at that time in
the amount of the then outstanding balance of the loan.3
In the present case, there is no dispute that Mr. White
defaulted on the 401(k) loan in 2001 upon his failure to make the
requisite installment payment within the specified cure period.
The record demonstrates that the balance due at the time of the
default was $6,662. Thus, pursuant to section 72(p)(1)(A), a
distribution is deemed to have been made at such time and in such
amount, and, pursuant to section 402(a), the distribution is
taxable.
Petitioners contend that they did not receive a taxable
distribution because Mr. White was merely borrowing his own
money. Although it is true that loan proceeds do not generally
3 Our analysis is based on the statute. We note that the
relevant regulation, sec. 1.72(p)-1, Income Tax Regs., is
generally applicable to assignments, pledges, and loans made on
or after Jan. 1, 2002. Sec. 1.72(p)-1, Q&A-22(b), Income Tax
Regs.; see Molina v. Commissioner, T.C. Memo. 2004-258. Thus,
the regulation is inapplicable to the present case; however, were
we to apply it, our analysis would remain the same. See sec.
1.72(p)-1, Q&A-1(a), Q&A-4(a), Q&A-10, Income Tax Regs.
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