- 126 -
periods or promissory notes based on intangible assets that are
not owned by the taxpayer.
Respondent contends, and we agree, that the reason the notes
were not finalized was because C&L was waiting for tax rulings
that would determine how the interest payments would be taxed.
There were no discussions on the repayment of the debt or on
obtaining security for the promissory notes. Petitioners argue
that the reason that there were no discussions as to repayment is
"obvious". Petitioners' obvious reason is that there was never
any question that the debt was intended to be repaid. It appears
equally obvious that petitioners were not concerned with
repayment. The delay in finalizing the promissory notes supports
respondent's view.
The delay in finalizing the promissory notes also indicates
a lack of arm's-length dealing. Advances to a closely held
corporation by its shareholders are subject to particular
scrutiny: "The absence of arm's-length dealing provides the
opportunity to contrive a fictional debt shielding the real
essence of the transaction and obtaining benefits unintended by
the statute." Gilboy v. Commissioner, T.C. Memo. 1978-114. An
unrelated third party would not transfer substantial assets over
a year in advance of receiving the promissory notes. An
unrelated third party would be concerned about repayment of the
notes when the asset supporting the notes consisted primarily of
Page: Previous 116 117 118 119 120 121 122 123 124 125 126 127 128 129 130 131 132 133 134 135 NextLast modified: May 25, 2011