Camp Corporation is owned by Hal and Ruthie, who have owned their stock since the corporation was formed fourteen years ago. The corporation uses the calendar year as its tax year and the accrual method of accounting. In Year 1, Camp borrowed $4 million from a local bank. The loan is secured by a lien on its machinery. Camp loaned 90% of the borrowings to Vickers Corporation at the same annual rate as the rate on the bank loan. Vickers also is owned equally by Hal and Ruthie. Vickers sells to the automobile industry parts that are manufactured by Camp and unrelated companies. Camps operating results suffered as a result of a slowdown in the automobile industry. The gross margin on its sales declined from $1 million in Year 1 to $200,000 in Year 2. Interest earned by Camp on the loan to Vickers is $432,000 in Year 2. Other passive income earned by Camp is $40,000. Camps accountant believes that the corporation is not a PHC because the interest income Camp earns can be netted against the $432,000 interest expense paid to the bank for the loan to Vickers. Is he correct in his belief?

A partial list of sources is IRC Secs. 542(a) and 543(a)(1) Reg. Sec. 1.543-1(b)(2) Bell Realty Trust, 65 T.C. 766 (1976) Blair Holding Co., Inc., 1980 PH T.C. Memo 80,079, 39 TCM 1255