Accruing Interest on Late Loan Payments

[Guest Dave Danziger]

The deemed distribution regulations (1.72(p)-1) provide several examples which demonstrate the need to accrue interest on late payments. Specific examples include (a) interest accruals during periods when loan payments may be suspended (e.g., during a leave of absence), and (B) interest accuals as of the time a loan becomes a deemed distribution.

The question I am strugling with is this - Must additional interest accrue if a loan payment is made late, but before a deemed distribution would incur. For example, consider a 5 year note with monthly payments due on the first of every month. Under the terms of the note, there is a grace period which ends on the last day of the quarter following the quarter in which the payment is due. In this case, the note expressly provides that no additional interest need accrue if a payment is made within the grace period. In this case, the borrower makes a single payment of all amounts due in the previous quarter just prior to the last day of the subsequent quarter.

Is it permissible to draft a note specifically avoiding additional interest during the grace period? In commercial loans, this is routine. However, a commercial loan would not provide such a long grace period (e.g., most notes allow 10, 15, or 30 days within which payment can be made without additional interest or penalty). The extended length of the grace period in this note is clearly permitted under the regs., but it is it reasonable not to accrue interest during such an extended period?

Do you have any knowledge of a requirement (in the regs, or in the opionion of the IRS) that interest accrue on loan payments made within the grace period, but after a commercially reasonable period of time (e.g., 30 days). Alternatively, do you know the name and/or phone number of any IRS or Treasury employee to whom I might address this question?

Thank you very much.