26 USC 7872 - Treatment of loans with below-market interest rates

U.S Code last checked for updates: May 03, 2024

§ 7872.

Treatment of loans with below-market interest rates

(a)

Treatment of gift loans and demand loans

(1)

In general

For purposes of this title, in the case of any below-market loan to which this section applies and which is a gift loan or a demand loan, the forgone interest shall be treated as—

(A)

transferred from the lender to the borrower, and

(B)

retransferred by the borrower to the lender as interest.

(2)

Time when transfers made

(b)

Treatment of other below-market loans

(1)

In general

For purposes of this title, in the case of any below-market loan to which this section applies and to which subsection (a)(1) does not apply, the lender shall be treated as having transferred on the date the loan was made (or, if later, on the first day on which this section applies to such loan), and the borrower shall be treated as having received on such date, cash in an amount equal to the excess of—

(A)

the amount loaned, over

(B)

the present value of all payments which are required to be made under the terms of the loan.

(2)

Obligation treated as having original issue discount

For purposes of this title—

(A)

In general

(B)

Amount in addition to other original issue discount

(c)

Below-market loans to which section applies

(1)

In general

Except as otherwise provided in this subsection and subsection (g), this section shall apply to—

(A)

Gifts

(B)

Compensation-related loans

Any below-market loan directly or indirectly between—

(i)

an employer and an employee, or

(ii)

an independent contractor and a person for whom such independent contractor provides services.

(C)

Corporation-shareholder loans

(D)

Tax avoidance loans

(E)

Other below-market loans

(F)

Loans to qualified continuing care facilities

(2)

$10,000 de minimis exception for gift loans between individuals

(A)

In general

(B)

De minimis exception not to apply to loans attributable to acquisition of income-producing assets

(C)

Cross reference

(3)

$10,000 de minimis exception for compensation-related and corporate-shareholder loans

(A)

In general

(B)

Exception not to apply where 1 of principal purposes is tax avoidance

(d)

Special rules for gift loans

(1)

Limitation on interest accrual for purposes of income taxes where loans do not exceed $100,000

(A)

In general

(B)

Limitation not to apply where 1 of principal purposes is tax avoidance

(C)

Special rule where more than 1 gift loan outstanding

(D)

Limitation not to apply where aggregate amount of loans exceed $100,000

(E)

Net investment income

For purposes of this paragraph—

(i)

In general

(ii)

De minimis rule

(iii)

Additional amounts treated as interest

(iv)

Deferred payment obligations

(2)

Special rule for gift tax

(e)

Definitions of below-market loan and forgone interest

For purposes of this section—

(1)

Below-market loan

The term “below-market loan” means any loan if—

(A)

in the case of a demand loan, interest is payable on the loan at a rate less than the applicable Federal rate, or

(B)

in the case of a term loan, the amount loaned exceeds the present value of all payments due under the loan.

(2)

Forgone interest

The term “forgone interest” means, with respect to any period during which the loan is outstanding, the excess of—

(A)

the amount of interest which would have been payable on the loan for the period if interest accrued on the loan at the applicable Federal rate and were payable annually on the day referred to in subsection (a)(2), over

(B)

any interest payable on the loan properly allocable to such period.

(f)

Other definitions and special rules

For purposes of this section—

(1)

Present value

The present value of any payment shall be determined in the manner provided by regulations prescribed by the Secretary—

(A)

as of the date of the loan, and

(B)

by using a discount rate equal to the applicable Federal rate.

(2)

Applicable Federal rate

(A)

Term loans

(B)

Demand loans

(3)

Gift loan

(4)

Amount loaned

(5)

Demand loan

(6)

Term loan

(7)

Husband and wife treated as 1 person

(8)

Loans to which section 483, 643(i), or 1274 applies

(9)

No withholding

No amount shall be withheld under chapter 24 with respect to—

(A)

any amount treated as transferred or retransferred under subsection (a), and

(B)

any amount treated as received under subsection (b).

(10)

Special rule for term loans

(11)

Time for determining rate applicable to employee relocation loans

(A)

In general

(B)

Paragraph only to apply to cases to which section 217 applies

(g)

Exception for certain loans to qualified continuing care facilities

(1)

In general

(2)

$90,000 limit

(3)

Continuing care contract

For purposes of this section, the term “continuing care contract” means a written contract between an individual and a qualified continuing care facility under which—

(A)

the individual or individual’s spouse may use a qualified continuing care facility for their life or lives,

(B)

the individual or individual’s spouse—

(i)

will first—

(I)

reside in a separate, independent living unit with additional facilities outside such unit for the providing of meals and other personal care, and

(II)

not require long-term nursing care, and

(ii)

then will be provided long-term and skilled nursing care as the health of such individual or individual’s spouse requires, and

(C)

no additional substantial payment is required if such individual or individual’s spouse requires increased personal care services or long-term and skilled nursing care.

(4)

Qualified continuing care facility

(A)

In general

For purposes of this section, the term “qualified continuing care facility” means 1 or more facilities—

(i)

which are designed to provide services under continuing care contracts, and

(ii)

substantially all of the residents of which are covered by continuing care contracts.

(B)

Substantially all facilities must be owned or operated by borrower

(C)

Nursing homes excluded

(5)

Adjustment of limit for inflation

In the case of any loan made during any calendar year after 1986, the dollar amount in paragraph (2) shall be increased by an amount equal to—

(A)

such amount, multiplied by

(B)

the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, by substituting “calendar year 1985” for “calendar year 2016” in subparagraph (A)(ii) thereof.

Any increase under the preceding sentence shall be rounded to the nearest multiple of $100 (or, if such increase is a multiple of $50, such increase shall be increased to the nearest multiple of $100).

(6)

Suspension of application

(h)

Exception for loans to qualified continuing care facilities

(1)

In general

(2)

Continuing care contract

For purposes of this section, the term “continuing care contract” means a written contract between an individual and a qualified continuing care facility under which—

(A)

the individual or individual’s spouse may use a qualified continuing care facility for their life or lives,

(B)

the individual or individual’s spouse will be provided with housing, as appropriate for the health of such individual or individual’s spouse—

(i)

in an independent living unit (which has additional available facilities outside such unit for the provision of meals and other personal care), and

(ii)

in an assisted living facility or a nursing facility, as is available in the continuing care facility, and

(C)

the individual or individual’s spouse will be provided assisted living or nursing care as the health of such individual or individual’s spouse requires, and as is available in the continuing care facility.

The Secretary shall issue guidance which limits such term to contracts which provide only facilities, care, and services described in this paragraph.

(3)

Qualified continuing care facility

(A)

In general

For purposes of this section, the term “qualified continuing care facility” means 1 or more facilities—

(i)

which are designed to provide services under continuing care contracts,

(ii)

which include an independent living unit, plus an assisted living or nursing facility, or both, and

(iii)

substantially all of the independent living unit residents of which are covered by continuing care contracts.

(B)

Nursing homes excluded

(i)

Regulations

(1)

In general

The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including—

(A)

regulations providing that where, by reason of varying rates of interest, conditional interest payments, waivers of interest, disposition of the lender’s or borrower’s interest in the loan, or other circumstances, the provisions of this section do not carry out the purposes of this section, adjustments to the provisions of this section will be made to the extent necessary to carry out the purposes of this section,

(B)

regulations for the purpose of assuring that the positions of the borrower and lender are consistent as to the application (or nonapplication) of this section, and

(C)

regulations exempting from the application of this section any class of transactions the interest arrangements of which have no significant effect on any Federal tax liability of the lender or the borrower.

(2)

Estate tax coordination

(Added Pub. L. 98–369, div. A, title I, § 172(a), July 18, 1984, 98 Stat. 699; amended Pub. L. 99–121, title II, §§ 201, 202, Oct. 11, 1985, 99 Stat. 511–513; Pub. L. 99–514, title V, § 511(d)(1), title XVIII, §§ 1812(b)(2)–(4), 1854(c)(2)(B), Oct. 22, 1986, 100 Stat. 2248, 2834, 2879; Pub. L. 100–647, title I, §§ 1005(c)(15), 1018(u)(48), Nov. 10, 1988, 102 Stat. 3393, 3593; Pub. L. 104–188, title I, §§ 1602(b)(7), 1704(t)(58), 1906(c)(2), Aug. 20, 1996, 110 Stat. 1834, 1890, 1916; Pub. L. 105–34, title III, § 312(d)(1), Aug. 5, 1997, 111 Stat. 839; Pub. L. 105–206, title VI, § 6023(30), July 22, 1998, 112 Stat. 826; Pub. L. 106–554, § 1(a)(7) [title III, § 319(30)], Dec. 21, 2000, 114 Stat. 2763, 2763A–648; Pub. L. 109–222, title II, § 209(a), (b)(1), May 17, 2006, 120 Stat. 351, 352; Pub. L. 109–432, div. A, title IV, § 425(a), Dec. 20, 2006, 120 Stat. 2974; Pub. L. 115–97, title I, § 11002(d)(14), Dec. 22, 2017, 131 Stat. 2062.)

cite as: 26 USC 7872