T1F6-12-20-Tax Adviser-Low Interest Loans-Godfrey

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Unformatted text preview: InterestlncomefiExpense — Below-Market Loans May Have Unexpected Tax Results Tax advisers should be aware of the type of arrangements subiect to imputed interest rules under Sec. 7872. This article describes the maior types of below- market loan transactions, as well as the exceptions and how the rules apply to such transactions. 350 THE TAX ADVISER / JUNE 2006 Sec. 7872 recharacterizes a “below—mar— ket” loan as an arms—length transaction in which the lender makes a loan to the bor— rower in exchange for a note requiring the payment of interest at a statutory rate. This article discusses the major types of below—market loan transactions and exceptions, and illustrates how the rules apply to such transactions. Background Value is transferred to a borrower when a loan is made that does not require pay— ment of interest, or requires interest at a below—market rate.The tax law recognizes such transfers of value. In 1984, the U.S. Supreme Court ruled1 that an interest— free loan by parents to their son was a “transfer of property by gift.”The Court reasoned that a parent who grants rent— free and indefinite use of commercial property to a child “has clearly transferer a valuable property right.The transfer of $100,000 in cash, interest—free,. . .is simi— larly a grant of the use of valuable proper— ty..,.The value of the use of money is found in what it can produce; the measure of that value is interest—‘rent’ for the use of the funds.” Later in 1984, Congress added Sec. 1 Esther Ditkman, 465 US 330 (1984). 2JCT, General Explanation aft/7e Revenue Provisions of Howard Godfrey, Ph.D., CPA Professor ofAttourLting Department ofAccounting University of North Carolina—Charlotte Charlotte, NC Robert Guinn, Ph.D., CPA Associate Professor of Accounting Department ofAccounting University of North Carolina—Charlotte Charlotte, NC Edward Malmgren, Ph.D., CPA Associate Professor of Accounting Department ofAccounting University of North Carolina—Charlotte Charlotte, NC 7872 to the Code, which provides detailed rules regarding the gift and income tax treatment for various below—market loans, The joint Committee on Taxation (JCT) report states that a below—market loan is the equivalent of a loan bearing a market rate of interest, accompanied by (1) an “extra payment” from the lender to the borrower and (2) a return of that “extra payment” back to the lender as a payment of interest on the loan.2 Sec. 7872 requires the lender to report interest income for an imputed “extra payment” from the bor— rower, even though the borrower makes no interest payment or pays interest at less than the market rate. In addition, the imputed “extra payment” may create compensation or dividend income to the borrower, depending on the relationship of the parties. Below-Market loans Sec. 7872(e)(1) defines a “below—market” loan as a loan that does not require inter— est payments, or requires such payments at a rate below a statutorily defined rate. Congress intended that “loan” be inter— preted broadly to include extension of credit. Any transfer of money that pro— vides the transferor with a right to repay— the Deficit Reduction Act of 1984, 98th Cong, 2d 5638. (12/31/84), p. 527. ment is a loan.3 For example, advances and deposits may be treated as loans. Demand or Term Loan A below—market loan fits into one of two categories: demand loan or term loan, Sec. 7872(f)(5) defines a demand loan as one payable in full at any time on demand of the lender. It may also include a loan with an indefinite matu— rity. Under Sec. 7872(f)(6), a term loan is any loan that is not a demand loan. Under Sec. 7872(a), (b) and (e), interest is imputed on a demand loan that (1) requires no interest payment or (2) has an interest rate below the applicable Federal rate Interest is imputed on a term loan when the loan amount exceeds the present value of the princi— pal and interest payments due under the loan. Imputed Interest Rate Sec. 7872(e) and (f) require the amount of imputed interest to be based on the current market interest rate as determined by a statutory for— mula that analyzes interest rates on Federal obligations of appropriate maturity. Each month, the IRS pub— lishes AFRs for short—term, mid—term and long—term loans. Imputed interest computations for a demand loan un— der Sec. 7872(f)(2) are based on the short—term rate in effect for the period for which the amount of forgone inter— est is being determined, For a term loan, imputed interest computations are based on the appropriate rate: short— term (not over three years), mid—term (over three years, but not over nine years) and long—term (over nine years) as of the day on which the loan was made. Sec, 7872(f)(2) requires the use of semi—annual compounding. For exam— ple, if the AFR is 10%, a loan that pays interest at the rate of10% per year is a below—market loan if it requires annual compoundingA loan with an interest rate tied to the prime rate charged by a major financial institution may be a below—market loan.According to Prop. 3 Id, at p.529. 4 Id. at p. 530. Regs. Sec. 1.7872—3(e), it is necessary to test a prime—rate demand loan in each semi—annual period to determine whether there is sufficient interest. Below—Market Loon Transactions Under Sec, 7872(c)(1), transactions involving imputed interest rules in— clude: 1.Compensation—related loans be— tween an employer and an employee or independent contractor; 2. Loans between a corporation and its shareholder; 3. Gift loans between relatives or friends; 4. Loans to a continuing care facility; 5. Tax avoidance loans; and 6. Other arrangements. Common Transactions Employer/employee: Under Sec. 7872(c)(l)(B), a below—market loan by an employer to an employee for the performance of services is a compensa— tion—related loanAn independent con— tractor may receive a compensation— related loan from a person to whom the independent contractor provides ser— vices. An arrangement is compensa— tion—related if a compensatory element arises from the transaction. Certain transactions could result in multiple transactions. For example, a below— market loan by an employer to a child of an employee may be a compensa— tion—related loan by the employer to the employee and a gift loan by the employee to the child.4 The employer’s receipt of deemed interest income is offset by a deemed deduction for compensation expense. The employee has imputed interest expense and receives compensation in exchangeThis imputed compensation income is included in wages subject to FICA and Federal Unemployment Tax5; however, under Sec. 7872(f)(9) income tax withholding is not required on this income.An independent con— 51d. I EXECUTIVE SUMMARY 1 I A below-market loan is broadly defined as a loan that does not require interest payments or requires such payments at a rate below a statutorily defined rate. loan rules may apply to a variety of i J transactions, including I The below-market ( loans between employers and employees, corporations and l shareholders, and relatives. I For individuals, the rules do not apply to small gift loans between individuals, and, for gift loans less than $100,000, imputed interest is limited to the borrower’s net . investment income. For more information about this article, contact Professor Godfrey at hgodfrey®ernail.uncc.edu. THE TAX ADViSER / JUNE 2006 351 Interestlncomefi’Expense — tractor is subject to the same rules for recognition of income, but not the reporting requirements applicable to employees. Corporation/shareholder: When there is a below—market loan by a cor— poration to its shareholder, the lender recognizes imputed interest income and is treated as having transferred that income back to the shareholder as a dividend or return of capitalThe bor— rower (shareholder) is treated as having received a distribution and then having paid interest expense to the lender. When a shareholder makes a below— market loan to a corporation, the share— holder has imputed interest income that is treated as being given back to the corporation as a contribution to capital. Gift loans: For below—market loans between family members or in other cases of donative intent, the lender has imputed interest income and is treated as making a gift to the borrower. The borrower is treated as having received a gift and returned the funds to the lender in the form of interest expense. Continuing care facility: A continu— ing care facility may require refiindable deposits from individuals who become residents.This type ofloan is covered by Sec. 7872, but, as explained later, there is a significant exception. Tax avoidance: Sec. 7872(c)(1)(D) defines a below—market loan as a tax avoidance loan when one of the prin— cipal purposes of the interest arrange— ment is the avoidance of any Federal tax by either the borrower or the lender. Under Sec. 7872(c)(3), the $10,000 de minimis exception is not applicable to a tax avoidance loan clas— sified as a compensation—related or a corporate—shareholder loan. ' _ Other arrangements: Sometimes, the classification of the imputed pay— ments depends on the transaction’s substance. For example, according to Prop. Regs. Sec. 1.7872—1(a), an inter— est—free loan to a charitable organiza— 6 Id. 7 Linda Craven, 215 F3d 1201 (11th Cir. 2000). 352 THE TAX ADVISER / JUNE 2006 tion is a loan on which adequate inter— est is charged, followed by a charitable contribution of the imputed interest from the lender to the charity. If the loan is made to an entity other than a shareholder or employee, the imputed transfer is handled in accordance with the nature of the relationship. The loan may give an indirect benefit to an employee, or it may be a form of addi— For a term loan, imputed interest is included as OID. tional compensation for the other enti— ty. The Committee Reports for Sec. 7872 include an example of an invest— ment banker being permitted by an issuer to retain the proceeds from a public offering of stock or debt for a period without paying interest.6 This arrangement is a below—market loan from the issuer to the banker. To the extent the benefit is in lieu of a fee for services, the loan is a compensation— related loan. Property Purchase Loan When a loan with a below—market interest rate is used in the purchase of property, either Sec. 483 or 1274 may require recognition of original issue discount (OID).The OID is amortized (as interest income to the seller and interest expense to the buyer) over the life of the loan, as required under Sec. 7872. Sec. 7872(f)(8) provides that Sec. 7872 is not applicable if Sec. 483 or 1274 applies to a loan. Divorce Settlement Loan In a divorce, one party may keep a major asset, such as the family business, and agree to pay the other party a sum of money over time to equalize the divorce settlement.This arrangement has raised the question of whether a divorce may result in (1) a sale of prop— erty with a below—market loan subject to Sec. 483 or 1274 or (2) a gift loan subject to Sec. 7872. For example, in Craven,7 the taxpay— er agreed to accept $4.8 million for redemption of her stock in a closely held corporation in a divorce settle— ment in 1991.The price was to be paid over a period of years and the note did not bear interest.The divorce agree— ment stated that Form 1099-INT would be issued each year for the imputed interest on the loan. The IRS conceded in court that the interest would not be taxable under Sec. 1274, if the stock redemption was held non— taxable under Sec. 1041.The Eleventh Circuit found that the redemption was not taxable under Sec. 1041, and accordingly found there was no imput— ed interest under Sec. 1274.This treat— ment was included in proposed regula— tions for Sec. 1274 issued in 1986, and was retained in final Regs. Sec. 1.1274— 1(b)(3) (iii) in 1992. Sec. 1041 treats a transfer of proper— ty in a divorce as a gift; however, that does not cause a below—market loan related to a property settlement to be a gift loan under Sec. 7872. Letter Rul— ing 86450828 addressed these issues for a note given to equalize the distribu— tion of assets in a divorce settlement. The IRS reasoned that Secs. 483 and 1274 do not apply in matrimonial transactions because they only apply to contracts for sale of property, and a transfer of property in a divorce under Sec. 1041 is not treated as an exchange. This rule is now part of the regulations for Secs. 483 and 1274.The IRS fur— ther reasoned that the parties negotiat— ed the settlement without donative intent, thus preventing the transaction from involving a gift loan under Sec. 7872.Accordingly, the IRS ruled Sec. 7872 does not apply to a noninterest bearing note given in a divorce settle— ment. 8 IRS Letter Ruling 8645082 (8/14/86). Determining and Reporting lmputed interest Term Loans With a below—market “term loan” (other than a gift loan), the “imputed interest” is computed under Sec. 7872(b) by subtracting (1) the present value ofall payments required under the loan from (2) the amount loaned. The amount loaned is the amount paid to the borrower.The imputed interest is treated as OID.The lender is treated as having transferred the OID amount to the borrower when the loan was made, and the borrower is treated as having received that amount on the same dayThe present value is comput— ed using the AFR in effect on the loan date. Sec. 1272 requires the lender to rec— ognize a portion of the OID as interest income each period. Sec. 163(6) requires the borrower to compute interest expense in a similar manner. This results in interest income and expense being recognized at a constant interest rate, based on the imputed bal— ance of the loan. Example 1: A corporation, C, makes a $200,000 no—interest loan for a term of two years to an employee, E, on jan. 1,2005. The AFR is 12%, compounded semi— annually.The present value of the $200,000 loan is $158,418.73. C is treated as making a loan of $158,418.73, with a maturity value of $200,000. C and E have OID of $41,581.27, which is reported as com— pensation expense by C and compen— sation income by E. Additionally, C will have interest income and E will have interest expense of $19,580.56 for Exhibit 1: Two-year loan of $200,000 paying no interest AFR 12%, compounded semi-annually Balance January 1 Interest for year Balance December 3] $l58,4l8.73 $19,580.56 $177,999.29 $177,999.29 2005 and $22,000.71 for 2006, as shown in Exhibit 1, above. Example 2: The facts are the same as in Ex— ample 1, except that C made. the $200,000 no—interest loan to a shareholder, S. C is treated as making a loan of $158,418.73, with a maturity value of $200,000, and a distribution of $41,581.27 to Sin 2005 that is treated as a dividend or return of capital under Sec. 301.The OID of$41,581.27 will result in interest expense for S and interest income for C of$19,580.56 for 2005 and $22,000.71 for 2006. 8 reports the dividend (or return of capital distribution) on the 2005 per— sonal income tax return and will be allowed a deduction for the imputed interest payments in 2005 and 2006, if the applicable requirements of Sec. 163 are met. However, C is not entitled to a deduction for the imputed distribution to S as an offset against its imputed interest income. ' The IRS may View the entire loan to S as a constructive dividend, rather than just the amount of the imputed interest on the loan.This is more likely if C fails to follow standard business practices such as requiring a signed note, collateral, a definite maturity date, periodic interest payments, etc.When such terms are established for a loan, it Loans between employers and employees, corporations and shareholders, and relatives provide a number of planning opportunities. $22,000.71 $200,000.00 is important for all parties to comply with all of them. Under Sec. 7872(b), when a term loan provides interest that is less than the AFR, imputed interest is determined by deducting the present value of interest and principal payments from the loan amount. If the loan in Example 1 pro— vided interest at a 5% annual rate, the present value of interest and principal payments would be $175,239.63, result— ing in imputed interest (CID) of $24,760.37.Thus, C and E would have interest expense or income of $21,659.62 for 2005 and $23,100.75 for 2006, consisting of $10,000 of interest paid each year plus imputed interest. Demand Loans With a “demand loan” the lender may demand payment at any time. It is not possible to compute OID by com— paring the present value of the sched— uled principal and interest payments with the amount loaned, because the loan does not have a fixed term. Under Sec. 7872(a), for demand loans, the lender has interest income (forgone interest) equal to the excess of (1) the interest that would have accrued on the loan using the AFR over (2) any inter— est actually paid on the loan.The parties are treated as though, on the last day of each calendar year, the lender trans— ferred an amount equal to the forgone interest to the borrower, and the bor— rower repaid this amount as interest to the lender. Example 3 shows how imputed interest is determined for a no—interest demand. loan made to an employee, a shareholder or as a gift. I Example 3: On]an.1, 2005, corporation X makes a $200,000 no—interest, demand loan.The loan is outstanding for two years THE TAX ADVISER / JUNE 2006 353 Interesthwomefi’ExPeme — and the AFR is 12%, compounded semi— annually The interest on the demand loan from January through June is $12,000. This forgone interest is added to the loan balance, causing the forgone inter— est from July through December to be $12,720.Thus, the total imputed inter— est income for 2005 is $24,720. X is treated as paying $24,720 to the borrower at the end of 2005, and the borrower is treated as transferring that amount back to X. The effects of this loan are shown in Exhibit 2 at right for (1) a compensation—related loan, (2) a corporation—shareholder loan and (3) a gift loan. Withholding Imputed Interest on Loans from Foreign Persons Temp. Regs. Sec. 1.7872—5T de— scribes situations in which a loan from a foreign person is not covered by Sec. 7872. However, compensation—related loans and certain corporation—sharehold— er loans are not excluded by the regula— tion.Thus, if the below—market loan is from a foreign corporation, the imputed payment of interest may be subject to withholding tax under Sec. 881, at the rate of 30% (which may be reduced by treaty). For example, in Climazo,9 aJapan— ese corporation made a $200,000, zero— interest loan to a shareholder, for the pur— chase of a home in the US. The shareholder withheld and paid a 10% withholding tax (low treaty rate) on the imputed interest payments to the Japan— ese corporation. The taxpayer filed a claim for refund, based on the position there was no requirement to withhold such taxes, because no actual payments were made. However, the court held that such withholding was required. No—Interest Term Loans that Are Gift Loans It is generally necessary to compute OID for below—market term loans to determine the amount of the deemed transfers between a borrower and a lender. However, for income tax pur— 9 Climate, ED NY, 1/19/96. 354 THE TAX ADVISER / JUNE 2006 Exhibit 2: Effect of no-interest demand loan described in Example 3 Type of Loan ' Lender Compensation- related loan Borrower lnterest income of $24,720 interest expense of $24,720 Compensation expense of $24,720 Compensation income of $24,720 Corporation-share- holder loan lnterest income of 524,720 Interest expense of $24,720 Dividend paid of $24,720 Dividend income of $24,720 Gift loan Interest income of $24,720 interest expense of $24,720 poses, Congress chose to apply the “forgone interest” approach to gift loans that are term loans. Congress believed familial or other close personal relationships are likely to exist between the borrower and the lender where there is a gift loan.These relationships may cause the parties to view the tech— nical provisions of the loan, such as maturity, as not being binding on the parties. However, for gift tax purposes, Sec. 7872(d)(2) provides a term gift loan is subject to the OID rules and not the forgone interest rules.This means the lender is treated as making a gift, sub— ject to the gift tax rules, in the amount of the OID. Example 4: On Jan. 1, 2005, P makes a $200,000 no—interest loan to a child, S, with a term of two years.The AFR is 12%, compounded semi—annually. The present value of the $200,000 payment discounted for two years at 12% compounded semiannually is $158,418.73.This means there is OID of $41,581.27 (see Example 1 above). For income tax purposes the parties use the forgone interest approach summa— rized in Example 3. P is treated as pay~ ing $24,720 to S at the end of each year, and S is treated as transferring that amount back to P as interest. However, for gift tax purposes, P should report a gift of$41,581.27 onJan. 1, 2005. Made gilt of $24,720 Received gilt of $24,720 Exceptions for Small Loans and Continuing Care Loans Sec. 7872(c)(2) provides interest is not imputed for gift loans between individuals, unless the total amount of the loan(s) exceed $10,000, or the loan is related to the purchase or car— rying of income—producing assets. For a gift loan that is not more than $100,000, imputed interest is limited to the borrower’s “net investment income” under Sec. 7872(d)(1).This exception does not apply if one of the principal purposes is the avoidance of any Federal tax.When a borrower has more than one gift loan, the net investment income is allocated among those loans in proportion to the loan amounts. If a borrower’s net investment income is not more than $1,000, the net investment income is treated as zero under Sec. 7872(d)(1)(E). Net investment income includes any amount which would be included in the gross income under Sec. 1272 if that section applied to all deferred pay— ment obligationsA deferred payment obligation includes any market dis— count bond, short—term obligation, U.S. Savings Bond, annuity or similar obligation.This definition of net invest— ment income includes some types of income not currently subject to income tax. Under see. 7872(c)(3), interest is not imputed for compensation—related or InterestlncomeG’Expense _ Exhibit 3: Loans generally exempt under Sec. 787 2 Part 1. Partial list of loans exempt from Sec. 7872 by Temp. Regs. Sec. 1.7872-5T r__—__.___________________ 1. Loans that are available to the public on the same terms and conditions and 6. Loans subsidized by the Federal, state (including the District of Columbia) or a municipal that are consistent with the lender's customary business practices. government under a program of general application to the public. 2. Acquisitions of publicly traded debt obligations for an amount equal to the 7. Below-market program-related loans by a private foundation or other charitable organi- public trading price. zation. 3. Accounts in a bank or credit union, maintained in the ordinary course of its 8. Employee-relocation loans that meet specified requirements. business. ' 4. Obligations on which the interest is excluded from gross income under Sec. 9. Loans by a life insurance company when the cash surrender value of a policy is used as 103. collateral. 5. Certain loans involving foreign persons. 10. Obligations of the US. government. Part 2. Other transactions that may be covered by Sec. 7872 *«l Transaction Comment 1. An advance or withdrawal of money against a partner’s distributive share of This is treated in the manner described in Regs. Sec. 1.731-1(a)(1)(ii). It is not a loan income. for purposes of Sec. 7872; see Prop. Regs. Sec. 1.7872-2. ——-r 2. An advance of money to an employee, salesman or other similar person to defray This is not a loan under Sec. 7872 if the amount of the advance is reasonably calculated anticipated expenditures. not to exceed the anticipated expenditures and the advance is made within a reasonable period before the anticipated expenditure (Prop. Regs. Sec. 1.7872—2). 3. Prepayment for use of property or services. This is not a loan if the prepayment is consistent with normal commercial practices (Prop. Regs. Sec. 1.7872-2). 4. Refundable deposits. May be treated as loans (Prop. Regs. Sec. 1.78722). 5. Debt associated with a property settlement in a divorce. Regs. Secs. 1.483-1 and 1.1274-1 provide that Secs. 483 and 1274 do not apply to pay- ments in connection with the transfer of property related to a divorce under Sec. 1041. The (RS held that payments on a note received in a property settlement in a divorce were not covered by Sec. 7872 (IRS Letter Ruling 8645082 (8/14/86)). 6. Split-dollar life insurance. Some split—dollar life insurance arrangements are subiect to Sec. 7872 (Regs. Sec. 1.7872-15). -—————————_——____—l____._._________.__m 7. Employee assistance fund that provides grants and/or loans to employees in times In IRS Letter Ruling 9314058 (1/14/93), an employer contributed funds to an exempt of financial hardship and natural disaster. organization that used those funds for loans to the company’s employees. Those loans were not covered by Sec. 7872. However, the IRS subsequently revoked that ruling because the loans did not accomplish one or more charitable purposes under Sec. 170(c)(21181 (IRS Letter Ruling 199917079 (5/30/9911. 8. Advances by an employer to a payroll processing company for payment of payroll In Letter Ruling 9852047 (12/24/98), the IRS ruled that such deposits are exempt from tax withholding, etc. the below-market loan provisions of Sec. 7872 (Temp. Regs. Sec. 1.7872-5TIb)(14)I. Note: Treasury has not issued final regulations for Sec. 7872, other than Regs. Sec. 1.7872-15, related to split-dollar life insurance. Treasury has issued Temp. Regs. Sec. 1.7872- 5T, which is the basis for Part 1 of this exhibit. Most of the existing regulations under Sec. 7872 are proposed regulations, such as the ones cited several times in Part2 of this exhibit. 356 THE TAX ADVISER / JUNE 2006 corporation—shareholder loans if the total amount of the loan(s) does not exceed $10,000.This exception does not apply to tax—avoidance loans. Once the balance of the loan exceeds $10,000, Sec. 7872 continues to apply even if sub— sequent payments reduce the balance below $10,000. Sec. 7872(g)(2) limits the amount of forgone interest or OID amortization for a below—market loan made by a lender to a qualified continuing care facility under a continuing care con— tract if the lender (or the lender’s spouse) is over age 65. The Code describes the types of facilities covered by the exception and notes that a facili— ty of a type traditionally considered a nursing home is not covered. For 2006, there is no imputed interest for a no— interest loan up to $163,300 to a con— tinuing care facility. This amount is adjusted for inflation each year. Planning Suggestions Loans made between employers and employees, corporations and sharehold— ers, and relatives provide a number of planning opportunities.The tax adviser should be aware of other arrangements that may be subject to imputed interest rules and of the exceptions to Sec. 7872, especially those that relate to small loans and continuing care facili— ties. Exhibit 3 on p. 356 contains a par— tial list of loans exempt from Sec.7872 and other transactions which involve loans that may be exempt, depending on the circumstances involved.The fol— lowing suggestions can minimize the effect ofSec. 7872. 1. Use care in establishing terms ofa loan to a relative, friend, employee or shareholder; specify a rate at least equal to the AFR to avoid the necessity of imputing interest income to the bor— rower. 2. When planning a below—market loan between a corporation and a sharehold— er, consult the IRS publication Audit Technique Guide for Shareholder Loans (June 2001) .To avoid having to treat the entire loan as a constructive dividend, there should be a written note, collateral, a stated maturity date and required peri— odic interest payments. In addition, the lender should enforce the terms of the loan and the borrower should comply with those terms. 3. Be aware of the types of loans that are not covered and those which are cov— ered by Sec. 7872; see Exhibit 3. 4. When determining whether a be— low—market gift loan qualifies for an exclusion based on the level of invest— ment income, recognize that invest— ment income includes items that may not be reported on Form 1040, such as an increase in value of US. Savings Bonds. 5. The aging population in the US. will have an increasing need for medical care. The Sec. 7872 exception for below—market loans for continuing care provides a way to realize the benefit from earnings on investments without being subject to income tax on that income. 6. If a below—market loan is made, properly account for forgone interest or amortization of OID and comply with all reporting requirements for FormW— 2 or 1099, etc. 7.When involved in gift tax planning or compliance, be sure to include any gift loans in the tax computations as required by Sec. 7872(d)(2). 8. When involved in estate planning or compliance, be sure to include any gift loans in the estate tax computations as required by Sec. 7872(h) Conclusion Below—market loans may yield sur— prises when they involve an exception to the time—honored rule that bor— rowing money is not a transaction that generates income. The borrower may be treated as receiving an imputed gift or imputed income, and may have imputed interest expense. The lender may have to recognize imputed inter— est income and possibly have an offset— ting expense as a result of making a loan. Information returns may be required and the transactions could be subject to payroll, income tax and/or gift tax. TI'A For us, Toll. dork, and handsome hoso whole other meaning. We're searching for the biggest of 826 species of trees for America’s National Register of Big Trees. Join the search. Help champion America’s biggest. The Register is online at http://Www.aniericanforests.org/ resources/bigtrees AMERICAN FORESTS’ National Register of Big Trees Big stories. Big controversies. Big trees. AMERICAN; ' @FORESTS" americanfurestsmirg I’D Hex EDI—LEI} \-'\-":Isllir1gtm]. DC El'jiiilli THE TAX ADVISER / JUNE 2006 357 ...
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