§ 7872. Treatment of loans with below-market interest rates
(a)
Treatment of gift loans and demand loans
(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—
(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—
(C)
Corporation-shareholder loans
Any below-market loan directly or indirectly between a corporation and any shareholder of such corporation.
(D)
Tax avoidance loans
Any below-market loan 1 of the principal purposes of the interest arrangements of which is the avoidance of any Federal tax.
(2)
$10,000 de minimis exception for gift loans between individuals
(A)
In general
In the case of any gift loan directly between individuals, this section shall not apply to any day on which the aggregate outstanding amount of loans between such individuals does not exceed $10,000.
(3)
$10,000 de minimis exception for compensation-related and corporate-shareholder loans
(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
For purposes of subtitle A, in the case of a gift loan directly between individuals, the amount treated as retransferred by the borrower to the lender as of the close of any year shall not exceed the borrower’s net investment income for such year.
(B)
Limitation not to apply where 1 of principal purposes is tax avoidance
Subparagraph (A) shall not apply to any loan the interest arrangements of which have as 1 of their principal purposes the avoidance of any Federal tax.
(C)
Special rule where more than 1 gift loan outstanding
For purposes of subparagraph (A), in any case in which a borrower has outstanding more than 1 gift loan, the net investment income of such borrower shall be allocated among such loans in proportion to the respective amounts which would be treated as retransferred by the borrower without regard to this paragraph.
(D)
Limitation not to apply where aggregate amount of loans exceed $100,000
This paragraph shall not apply to any loan made by a lender to a borrower for any day on which the aggregate outstanding amount of loans between the borrower and lender exceeds $100,000.
(E)
Net investment income
For purposes of this paragraph—
(i)
In general
The term “net investment income” has the meaning given such term by section
163
(d)(4).
(ii)
De minimis rule
If the net investment income of any borrower for any year does not exceed $1,000, the net investment income of such borrower for such year shall be treated as zero.
(iii)
Additional amounts treated as interest
In determining the net investment income of a person for any year, any amount which would be included in the gross income of such person for such year by reason of section
1272 if such section applied to all deferred payment obligations shall be treated as interest received by such person for such year.
(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—
(2)
Forgone interest
The term “forgone interest” means, with respect to any period during which the loan is outstanding, the excess of—
(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—
(3)
Gift loan
The term “gift loan” means any below-market loan where the forgoing of interest is in the nature of a gift.
(5)
Demand loan
The term “demand loan” means any loan which is payable in full at any time on the demand of the lender. Such term also includes (for purposes other than determining the applicable Federal rate under paragraph (2)) any loan if the benefits of the interest arrangements of such loan are not transferable and are conditioned on the future performance of substantial services by an individual. To the extent provided in regulations, such term also includes any loan with an indefinite maturity.
(10)
Special rule for term loans
If this section applies to any term loan on any day, this section shall continue to apply to such loan notwithstanding paragraphs (2) and (3) of subsection (c). In the case of a gift loan, the preceding sentence shall only apply for purposes of chapter 12.
(11)
Time for determining rate applicable to employee relocation loans
(A)
In general
In the case of any term loan made by an employer to an employee the proceeds of which are used by the employee to purchase a principal residence (within the meaning of section
121), the determination of the applicable Federal rate shall be made as of the date the written contract to purchase such residence was entered into.
(B)
Paragraph only to apply to cases to which section
217 applies
Subparagraph (A) shall only apply to the purchase of a principal residence in connection with the commencement of work by an employee or a change in the principal place of work of an employee to which section
217 applies.
(g)
Exception for certain loans to qualified continuing care facilities
(1)
In general
This section shall not apply for any calendar year to any below-market loan made by a lender to a qualified continuing care facility pursuant to a continuing care contract if the lender (or the lender’s spouse) attains age 65 before the close of such year.
(2)
$90,000 limit
Paragraph (1) shall apply only to the extent that the aggregate outstanding amount of any loan to which such paragraph applies (determined without regard to this paragraph), when added to the aggregate outstanding amount of all other previous loans between the lender (or the lender’s spouse) and any qualified continuing care facility to which paragraph (1) applies, does not exceed $90,000.
(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,
(4)
Qualified continuing care facility
(A)
In general
For purposes of this section, the term “qualified continuing care facility” means 1 or more facilities—
(B)
Substantially all facilities must be owned or operated by borrower
A facility shall not be treated as a qualified continuing care facility unless substantially all facilities which are used to provide services which are required to be provided under a continuing care contract are owned or operated by the borrower.
(5)
Adjustment of limit for inflation
(A)
In general
In the case of any loan made during any calendar year after 1986 to which paragraph (1) applies, the dollar amount in paragraph (2) shall be increased by the inflation adjustment for such calendar year. 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).
(B)
Inflation adjustment
For purposes of subparagraph (A), the inflation adjustment for any calendar year is the percentage (if any) by which—
For purposes of the preceding sentence, the CPI for any calendar year is the average of the Consumer Price Index as of the close of the 12-month period ending on September 30 of such calendar year.
(h)
Exception for loans to qualified continuing care facilities
(1)
In general
This section shall not apply for any calendar year to any below-market loan owed by a facility which on the last day of such year is a qualified continuing care facility, if such loan was made pursuant to a continuing care contract and if the lender (or the lender’s spouse) attains age 62 before the close of such year.
(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—
(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.
(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,