Comments Concerning IRS Notice 2001–10
I. Characterizing Equity SDAs
- Section 7872
- Difference in Tax Treatment – Demand Loans vs. Term Loans
Not all below-market loans are treated the same under Section 7872. Arrangements must be classified as either "demand loans" or "term loans." The difference in taxation between "term loans" and "demand loans" is substantial. A "term loan" results in the lender (the employer) transferring the present value of the foregone interest for the entire term of the loan as compensation to the borrower (the employee) in the year in which the loan is made. In contrast, a "demand loan" results in the lender transferring the foregone interest to the borrower on an annual basis.