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7872(f)(2)ApplicableFederal Rate In the case of a demand loan, the applicable Federal rate shall be the Federal short-term rate in effect under section 1274(d) for the period for which the amount of forgone interest is being determined, compounded semiannually.
(1) Below-market loanThe term below-market loan means any loan if (A) in the case of a demand loan, interest is payable on the loan at a rate less than the applicable Federal rate, or. (B) in the case of a term loan, the amount loaned exceeds the present value of all payments due under the loan.
Under Section 7872(c)(1), Section 7872 applies to these categories of below- market loans: Gift loans. Any below-market loan where one of the principal purposes is the avoidance of any federal tax. Certain loans to qualified contin- uing care facilities.
Section 7872 generally treats certain loans in which the interest rate charged is less than the applicable Federal rate as economically equivalent to loans bearing interest at the applicable Federal rate, coupled with a payment by the lender to the borrower sufficient to fund all or part of the payment of interest by
section 7872(f)(2)(B) states that the applicable federal rate is the federal short-term for the period for which the amount of foregone interest is being determined, compounded semi-annually. Because federal rates can change can change monthly, the calculation of interest would have to be month-by-month, although it

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The applicable federal rate (AFR) is the interest rate that applies to personal loans. It is the minimum rate applicable to such loans under U.S. law. The AFR is implemented in the form of federal tax regulations that are enforced by the Internal Revenue Service (IRS).
Section 7872 of the Code generally treats loans bearing a below-market interest rate as if they bore interest at the market rate.

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