Imputed Interest

[Snaggletooth]

Is it necessary to impute interest on all obligations where interest is unstated?

For example, what about an installment sale that transpires over a number of years, but where no profit or loss occurred on the sale?

What about "Due to Shareholders" in cases where the shareholder has advanced money to a corporation and the advance has remained on the books for over one year??

[Burke]

In the first case, I say yes, even if no gain/loss, there is still the time value of money involved so interest should be imputed. Do not know about rules on the second instance re: loan on books, but logic would probably dictate yes as well, IMO.

[Kram BergGold]

Installment sale

You can't have an installment sale unless there is a profit.

[Burke]

No, but there is still a contract note due over a period of time, which interest should be paid on, therefore -- imputed. Unless the seller wants to treat it as a gift and exclude each year.

[Davc]

If seller treats it as a gift seller is still required to report the interest income. And the buyer is deemed to have paid it.

[Burke]

Well, the discussion has expanded, and there might be all kinds of variables, but we don't have sufficient information in the OP to tell if they apply. Would recommend following cites:
Publ 537, pages 9-11, and IRC 7872.

[Snaggletooth]

Gift of Imputed Interest

I believe the maker of the debt can "gift" the imputed interest to the debtor and this can be treated as gifted from the source, i.e. not reportable as interest if the gift election is made.

Otherwise the maker has to pay income tax (not gift tax) on the gift. And the debtor has interest expense on an expenditure he doesn't even have to pay.

I believe if the maker chooses to gift the imputed interest, it is not reportable at all, and the debtor cannot deduct it. The maker still has to account for the amount as a gift toward the annual gift exclusion.

[Davc]

I agree with this:

When you make a below-market loan to a relative or any other non-business party, the Code treats you as making an “imputed gift” to your borrower. Business-related loans follow similar concepts, except the offset is not a gift; instead, it is compensation or a capital-related item. The “deemed” gift you make equals the difference between the AFR interest you should have charged and the interest you actually charged. The borrower is then deemed to pay these phantom dollars back to you as “imputed interest,” and you must report the imputed interest as taxable income. To make matters worse, when your imputed gift to the borrower exceeds $11,000, you will owe gift tax if you have exhausted your lifetime exemption.

This is a good summary of the rules.

http://www.sw-cpa.com/bottomline/articles/2005-03/belowmarket.htm