A demand loan
is a below-market loan if interest is payable at a rate less than the AFR, while a term loan is a below-market loan if the amount loaned exceeds the present value of all payments due under the loan using the appropriate AFR for the month the loan is made.
In any event, the Service, in a Revenue Ruling published in 1973, extended the holding of the Blackburn to gift demand loans
. (20) In the case of a demand loan
, the value of the interest-free repayment obligation cannot be ascertained at the time the loan is made, because the repayment date is not known in advance, nor is it pegged to predictable external events.
A split-dollar term loan is any loan that is not a demand loan
(e.g., a loan payable in full in 15 years).
The $10,000 de minimis rule for term loans is similar to the one for demand loans
; however, once a term loan has exceeded $10,000, it continues to be subject to the below-market loan rules, even if the balance later falls below $10,000.
Regardless of whether a term has been specified, all gift loans are treated as demand loans
for income tax purposes.
(2) Is the loan a demand loan
or a term loan (including loans with indefinite maturities)?
The applicable Federal rate for demand loans
is the short-term rate in effect under IRC Sec.
For demand loans
with principal amounts that fluctuate during the year, the minimum interest rate is based on a month-by-month computation using the short-term applicable federal rate issued for each month.
A demand loan
is usually a short-term loan with no set repayment schedule.
Many owners of closely held businesses have fluctuating demand loans
to or from their businesses and accordingly use the short-term or demand-loan rate that is specified by the IRS.
The centre will consider three major types of loans - demand loans
, term loans and equity investments.