The application of Code § 7872 to interest-free or below-market loans has certai

Question

The application of Code § 7872 to interest-free or below-market loans has certain tax consequences for the lender and borrower. They include

            a.         the borrower may be allowed an itemized deduction for the interest hypothetically paid to the lender.

            b.         the lender is not required to report the hypothetical payment as interest income until the loan is repaid.

            c.         the lender treats the hypothetical payment as earned income.

            d.         the lender is deemed to have made a completed gift of the loan amount.

Explanation / Answer

A.the borrower may be allowed an itemized deduction for the interest hypothetically paid to the lender.

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