Carl E. Jones and Elaine Y. Jones - Page 21

                  Development accrued interest at the rate of 10 percent on                           
            the withdrawn amounts and increased the loan balance for the                              
            amount of the unpaid interest.  The accrued interest was reported                         
            as S corporation income by petitioners on their returns.                                  
            Although petitioners' inclusion of the interest income on their                           
            returns is a factor that weighs in favor of finding that interest                         
            was charged, the fact that no interest actually was paid is a                             
            fact that weighs against finding that the withdrawals are loans.                          
            The tax savings that would result by reporting the distributions                          
            as loans, and then reporting the interest that accrued on the                             
            distributions as income, are obvious.  Reporting the interest                             
            accrued on the loans as income was a relatively painless way for                          
            petitioners to give the withdrawals the protective coloration of                          
                  Development credited the loan account for petitioner's                              
            repayments.  Petitioner contends that his "repayments"                                    
            demonstrate his intention to repay the amounts withdrawn.                                 
            Usually, a shareholder's repayments are strong evidence that a                            
            withdrawal was a loan.  The repayments, however, must be bona                             
            fide.  Crowley v. Commissioner, T.C. Memo. 1990-636, affd. 962                            
            F.2d 1077 (1st Cir. 1992).  Petitioner's purported repayments                             
            were made in the form of debt assumptions and reclassification of                         
            loans as salary which petitioner applied against the outstanding                          
            loan balance.                                                                             

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