Vanderbilt Law Review


James T. O'Hare

First Page



The dramatic rise in interest rates in the United States in the past few years has given added significance to the uncertain tax consequences of interest-free loans made between family members, between corporations and shareholders, and between affiliated corporations. Such loans can create a variety of tax problems depending on the relationship of the parties. An interest-free loan from one family member to another may constitute a gift equal in value to the use of the money loaned or even to the amount of the entire principal. A corporation that makes an interest-free loan to one of its shareholders not only risks the imposition of a constructive dividend on the shareholder in an amount equal to the value of the use of the money loaned, but also marks itself as an attractive candidate for imposition of the accumulated earnings tax since it apparently has little need for productive employment of the funds in its own business.' Furthermore, interest-free loans between affiliated corporations may cause the Commissioner to invoke his authority under section 482 of the Internal Revenue Code to reallocate gross income, deductions, credits and allowances among the corporations involved in order to prevent evasion of taxes or clearly to reflect income. The specific adjustments that must be made in the case of an interest-free loan between commonly controlled corporations are detailed in the regulations promulgated under section 482 and have been the subject of extensive litigation in recent years. It is the purpose of this article to explore the tax treatment of interest-free loans in these various situations.

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