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How Low Can You Go? Some Consequences of Substituting a Lower AFR Note for a Higher AFR Note

Journal of Taxation, Vol. 109, No. 1, p. 22, 2008

11 Pages Posted: 19 Jul 2008  

Jonathan G. Blattmachr

Milbank, Tweed, Hadley & McCloy LLP

Bridget J. Crawford

Pace University School of Law

Elisabeth O. Madden

affiliation not provided to SSRN

Date Written: July 18, 2008

Abstract

Intrafamilial arrangements labeled as loans have long invited special scrutiny from the Internal Revenue Service. In some cases, the IRS has successfully established that the arrangement was not a loan but another type of transfer, such as a gift. In the wake of several IRS victories in cases where somewhat "informal" financial arrangements between family members were held not to be loans, many advisors to individual taxpayers counsel that when a child borrows money from a parent, for example, the loan should be documented, interest-bearing, secured and repaid (at least in part), if the transaction is to be free of unexpected and in some cases adverse tax consequences. In any event, even where the financial arrangement is respected as a loan, tax effects, such as generation of interest income taxable to the lender or the trigger of a gift tax on either the borrower or the lender, may arise. This article briefly will discuss some of these consequences. It also will discuss in more detail some effects of substituting a new note at the so-called "applicable federal rate" which is lower than the interest rate payable on the old note.

Keywords: loans, gift loan, family loan, interest rate, applicable federal rate, promissory note, substitution

JEL Classification: K34, K39

Suggested Citation

Blattmachr, Jonathan G. and Crawford, Bridget J. and Madden, Elisabeth O., How Low Can You Go? Some Consequences of Substituting a Lower AFR Note for a Higher AFR Note (July 18, 2008). Journal of Taxation, Vol. 109, No. 1, p. 22, 2008. Available at SSRN: https://ssrn.com/abstract=1162830

Jonathan G. Blattmachr

Milbank, Tweed, Hadley & McCloy LLP ( email )

1 Chase Manhattan Plaza
New York, NY 10005
United States
212-530-5066 (Phone)

Bridget J. Crawford (Contact Author)

Pace University School of Law ( email )

78 North Broadway
White Plains, NY 10603
United States

Elisabeth O. Madden

affiliation not provided to SSRN ( email )

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