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The parties have stipulated that the journal entry evidenced
the receivable as valid debt of Mr. Lechner to Stainless.5
Although in many cases we have found that corporate accounting
entries setting up a receivable from a shareholder were equivocal
and insufficient to create valid debt, particularly in the
absence of an accompanying note and interest payments, see, e.g.,
Haber v. Commissioner, 52 T.C. 255, 266 (1969), affd. 422 F.2d
198 (5th Cir. 1970), the pattern of repayments and reductions of
the receivable, evidenced by Mr. Lechner’s payment of the
liabilities for the associated expenses, supports the treatment
4(...continued)
to make the payments, the transferee corporation, if it also uses
the cash method, is treated as a successor and allowed to report
the receipts and payments on its own income tax return if the
receivables and payables were transferred to it in the sec. 351
exchange. However, there is no intimation in the foregoing
authorities that the receivables and payables must be so
transferred; an acceptable alternative would be for the
transferor to retain and collect and pay the respective
receivables and payables and to use the new corporation to make a
“fresh start” with new business. We treat as of no account the
discrepancy between the recital in the sec. 351 statement that
the only liability assumed by Stainless was withheld payroll
taxes and its claiming of Mr. Lechner’s payments of liabilities
related to the work in progress as its deductible expenses.
5 If the journal entry had not been so stipulated, Mr.
Lechner’s taking of the corporate receipts would have been
treated as a constructive distribution to him in 1993, taxable as
a dividend to the extent of corporate earnings and profits for
the corporate fiscal year in which it occurred, and his payments
of the expenses would have been treated as capital contributions
to Stainless.
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