Pursuant to 26 USCS § 7872, dividend treatment, in the case of loans described as compensation-related loans or corporation-shareholder loans, does not apply to any day on which the aggregate outstanding amount of loans between the borrower and lender does not exceed $ 10,000. Compensation-related loans are any below-market loan directly or indirectly between an employer and an employee, or an independent contractor and a person for whom such independent contractor provides services.  Corporation-shareholder loans refer to any below-market loan directly or indirectly between a corporation and any shareholder of such corporation.

However, this exception shall not apply to any loan, the interest arrangements of which, have as one of their principal purposes the avoidance of any federal tax.  A below-market loan is defined as a loan that does not require interest payments or requires such payments at a rate below a statutorily defined rate.  Below-market loans shall apply to a variety of transactions and shall include:

• Gifts
• Compensation-related loans
• Corporation-shareholder loans
• Tax avoidance loans
• Other below market loans
• Loans to qualified continuing care facilities.

26 USCS § 7872 provides that a below-market loan refers to any loan if with respect to a demand loan, interest is payable on a rate lower than the applicable Federal rate, or in the case of a term loan, the amount loaned exceeds the current value of all payments due under the loan.  When there is a below-market loan by a corporation to its shareholder, the lender recognizes imputed interest income and is treated as having transferred that income back to the shareholder as a dividend or return of capital.  Further, when a shareholder makes a below-market loan to a corporation, the shareholder has imputed interest income that is treated as being given back to the corporation as a contribution to capital.