my opinion is the IRS would say you have interest income. to make a gift you have to have property to give. so I think the IRS would argue you had constructive receipt of the interest which you gave back.
there is also IRS code section 7872 which deals with gift loans. so that might be invoked which would put you in the same situation
Gift Loans
Section 7872(f)(3) states, The term “gift loan” is any below-market loan where the forgoing of interest is in the nature of a gift.” Essentially, if you lend property at a rate below the applicable federal rate (AFR) published by the IRS, the difference between the AFR and the loan rate is considered a gift. The AFR is meant to reflect a fair market rate of interest that independent parties would negotiate in an arms-length transaction. From a tax perspective, the AFR eliminates preferential treatment between related parties by applying a minimum market rate of interest. AFRs are published monthly, and different AFRs will apply to different loans, depending on the term of the loan. In general, the longer the term of the loan, the higher the rate that will apply (just as in the marketplace).
By lending at a below-market rate, you are forgoing interest that the borrower would pay in the marketplace, resulting in an imputed gift for tax purposes. The most common occurrence of gift loans is intra-family loans, but the imputed gift rules in Section 7872 apply to any below-market loan, such as compensation-related and corporation-shareholder loans, below-market loans with the purpose of avoiding federal tax, interest arrangements.
