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Member
 
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Last Login: 12/20/2011 9:32:01 AM
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| Mother's Living trust lends money to a long-standing General Partnership, made up of children. Both are cash-basis. Is there a requirement to expense interest on the partnership or record it as income for the mother? If the intention is to pay interest upon payment of the note (when she dies) is there a current gift, or anything else that needs to be done. Or can the loan just sit there until her death? Thank you.
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Power Member
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Last Login: 3/12/2011 12:58:57 PM
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| This is one of those transactions governed by Sec. 7872. If no interest is paid, some can be imputed - giving Mom income and the kids a deduction. Mom will also have made a gift which could be inconvenient if she's also doing annual exclusion gifts. I think it's better to have a note with the AFR as the scheduled interest rate and actually pay it if possible. If the note doesn't have a term and an interest rate, the blended AFR applies. The January 2007 rate was relatively low for a note greater than 9 years.
Mary Kay Foss
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Last Login: 12/20/2011 9:32:01 AM
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| Thanks for your response. You say that the interest "can" be imputed. I am wondering if it "has" to be. Can they just do nothing? Or would they have to divide the interest owed annually by the number of children and if its over $12,000 do a gift tax return. Or since both parties are cash basis, can they let things alone and reconcile it all upon the mothers death. This loan came about as, after the father's death, the mother sold her interest in a property to the children;s general partnership, with a loan taken back. The partnership had owned and depreciated their portion over many years. Thanks Harlan Levinson, CPA
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| Harlan, in response to your second question, I would refer to IRC Section 7872(a). In the code it says "the forgone interest shall be treated as" so if your loan falls within the purview of Section 7872 the inputting of interest is not optional but mandatory. Section 7872(a)(2) deems the transfers, interest and gifts in this case, at the end of each calendar year. There is no provision to wait until the some time. So you must make the compuations annually and report the transactions annually.
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Member
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| Thanks. This loan came about because of a sale between the mother/trust and the partnership made up of the children for the FMV-not some tax avoidance device. There could very well be an interest figure in the loan documents, I would assume there is an interest rate in the document. Therefor, is this a loan subject to 7872? It is not a gift loan, shareholder, tax-avoidance loans, etc. (the loans that it says are subject to 7872) And if there is a stated and fair interest rate, would this fall under 7872 and would they have to report the interest and or gifts each year? Harlan Levinson, CPA
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| Harlan, your revised assumptions has answered your own question. If the rate of interest stated on the note excedes AFR and the present value of all payments under the loan, using the AFR in the computation, are under the amount loaned then the loan is not a below market loan and outside of Section 7872. If lender decides to payments under the loan then you have gift and forgiveness of indebtedness issues.
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Power Member
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| If no interest is being exchanged and the parties are related IRS will look at this as a tax avoidance loan. If the interest rate initially specified was reasonable when the loan started you use that. If it was less than the AFR at that point you use the AFR. I don't see how you can get around it.
Mary Kay Foss
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