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Business Planning Keyed to Gevurtz
Bauer v. Commissioner
Citation:
748 F.2d 1365 (1984)Facts
Philip Bauer and Phillip Himmelfarb formed Federal Meat Company in 1958 with paid-in capital of $20,000. Bauer owned 25% and Himmelfarb owned 75% of the stock. Since incorporation, they advanced various amounts of money to Federal. Each advance was evidenced by a negotiable, unsecured promissory note payable on demand with interest rates of 7% during 1972-1974 and 10% in 1976. The notes were not convertible into stock nor subordinated to other obligations. Federal recorded these advances as loans on its books and financial statements, paid interest regularly, and deducted these interest payments on its tax returns. The stockholders reported the interest as income and treated principal repayments as return of capital. Federal never paid dividends, retaining earnings for growth. By fiscal year-end 1976, Federal had retained earnings of $486,092. The Commissioner recharacterized these advances as capital contributions, disallowed Federal’s interest deductions, and treated principal repayments as taxable dividends to the stockholders.
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