amount. Since non-business rent
would not be deductible, the transaction could be considered an "other below-market loan." Hopefully, these transactions will be exempted in the regulations because of the cost of complying and other factors to be considered.
exception amounts, all loans between the lender and the borrower, regardless of interest rate,
are included. Furthermore, if a loan exceeds the amount. the imputed interest rules continue to apply even after the outstanding balance is reduced below the amount. u
be practitioners who choose to treat these rules similarly to the generation-skipping tax-so complicated that they are ignored. Nevertheless, practitioners should be aware of potential tax consequences to their borrower and more
significantly, lender-clients under the new rules. 0
Exceptions There are a few exceptions. For example, in the case of a gift loan between individuals, the new rules do not apply to loans which do not exceed $10,000. However, this exception only applies if the loan is not used to purchase or carry income-producing assets.2$
Therefore, in typical educational funding transaction described above, the new rules would apply even though the amount was less than $10,000. Where the proceeds are not used to purchase incomeproducing assets, as where a loan
is made to a relative to start up a business or to make a down payment on a residence, this exception should prevent any amount
Effective Dates These new rules apply to term loans made after June 6, 1984, and to demand loans outstanding after June 6, 1984. Any loan renegotiated, extended or revised after
that date shall be treated as a loan made after that date."
corporate-shareholder types of loans. However, these new rules
quences. In some instances it will
at below-market.
dictate a new method of planning. For example, funds needed for education of a child may be shifted from the parent to the child through the use of a Clifford Trust. a trust under Section 2S03(c), use of the Uniform Gift to Minors Act, or a recently discussed Spousal Re-
In computing
whether
44/Arkansas LawyerlJanuary t985
mainder Trust. Other transactions
will not be restructured, but the parties will merely be required to report the transaction on the basis of the new rules.
the
amount of a loan exceeds the
• 585 F.2d 234 (7th Cir. 1978), affg 67 T.C. 1060 (977). Suttle v. Commissioner, 625 F.2d 1127
Cir. 1982). aU'g 75 T.C. 166 (980); Martin v. Commissioner, 649 F.2d 1133 (5th Cir. 1981); Greenspun v. Commissioner, 670 F.2d 123 (9th Cir. 1982). affg 72 T.C. 931
education expenses and to channel income to parents. as well as
tax reason for structuring the loan
avoidance. 27
I. supra. Dean, note I. supra at 1090.
Baker v. Commissioner, 677 F.2d II (2nd
compensation-related loans and corporation-shareholder loans of $10,000 or less, so long as one of the principal purposes of the loan is not the avoidance of any federal tax." To rely on this exception, there should be a legi timate non-
the year. Even this exception does not apply where one of the principal purposes of the loan is tax
J
The new below-market loan provisions will prohibit the type of interest-free loans used to fund
to another, even to regular checking accounts. As with other recent tax laws, much of the law is to be drafted by the Treasury Department in the form of regulations. Practitioners should remember that the new provisions do not prohibit a below-market loan; they merely change the tax conse-
rower's net investment income for
3t5 Ost Cir. 1981).
(4th Cir. 1980). affg T.C. Memo. 1978-393;
of money from one person or entity
Finally, there is a speciallimitation for gift loans which do not exceed $100,000. In that event, the amount 01 the lender's imputed income will not exceed the bor-
Dean, note
I
there may still be a gift to the borAnother exception exists for
2
Conclusion
rower.
income. Under Dickman, however,
Dean v. Commissioner, 35 T.C. 1083 (1961); Beaton v. Commissioner, 664 F.2d
• 1973-2 C.B. 4.
do not stop at applying to the traditional types of transactions. As currently drafted, these provisions could apply to any advance
from being included in the lender's
FOOTNOTES I
Finally, there will undoubtedly
(979). Green.pun v. Commissioner. 72 T.C. 931 (979) at 943. • Hardee v. Commissioner, 710 F.2d 1391
1
(Fed. Cir. 1983), rev'g Ct. CI. , Dickman v. Commissioner, 690 F.2d 812 (11th Cir. 1982), cert. granted. 103 S.Ct.
1181, affd 104 S.Ct. lOBS (984). III
Dickman v. Commissioner. 104 S. Ct.
1086 (1984), affg 690 F.2d 812 (11th Cir. 1982). The Tax Reform Act of 1984, as Division A of the Deficit Reduction Act of 1984 (ORAl. Section 172. n Several cases had decided that the lender recognized. no income as a result of the interest·free loan. Combs Lumber Co.. 41 B.T.A. 339 (1940); Society Brand II
Cloth••, 18 T.C. 304 (1952). U
14
New Section 7872(eXl). New Section 7872(f)(2); New Section
1274(dXII. as added hy DRA Section 4I(a). l~
This is the short-term rate based on interest paid on an annual basis. I.R. 84-115,
II
Conference Report, H. Rep't. No. 98-861, 98th Cong., 2d Sess. at 1018. New Section 7872(cXIXB).
1984-47 I.R.B. 11
1. Conference Report at 1018. New Section 7872(c)(I)(C). New Section 7872(cXI)(D). ~l Conference Report at 1019. 12 New Section 7872(c)(IXE). 13 Conference Report at 1018. 14 Conference Report at 1019. ~~ New Section 7872(cX2). U New Section 7872{c)(3). 21 New Section 7872(dXI). 21 Conference Report at 1021. n ORA Section 172(c)(l). I'
21