Brazoria County Stewart Food Markets, Inc. - Page 15




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          capital.  Where there is no capital, the creditor is exposed to             
          the risks of a shareholder, not a lender.  Calumet Indus., Inc.             
          v. Commissioner, 95 T.C. 257, 288 (1990).                                   
               Grocers’ loans to petitioner were secured by petitioner’s              
          assets, whereas petitioner’s advances were exposed to the risks             
          of UPE’s business.  We find it significant that petitioner’s and            
          UPE’s financial records did not show the advances as loans or               
          debt.  In that regard, petitioner is an accrual method taxpayer,            
          but no interest was reflected on petitioner’s books or Federal              
          income tax returns with respect to the advances to UPE.                     
          Petitioner’s accountants/return preparers testified that it would           
          have been appropriate to report interest income.  The                       
          accountants, however, were unaware of petitioner’s advances to              
          UPE.  Similarly, no interest expenses from the advances were                
          reflected on UPE’s Federal income tax returns.  When a corporate            
          contributor does not seek or pursue interest on its contribution,           
          its gain, if any, would more likely be from a share of profits              
          and/or increase in the value of its shareholdings.  See Estate of           
          Mixon v. United States, supra at 409.                                       
               In the same manner as petitioner’s and UPE’s failure to book           
          the advances, the habitual postponement of UPE’s obligation to              
          repay is telling.  That is especially so here, where UPE had                
          ample opportunity to repay petitioner from progress payments                
          received from Formosa.  We note that approximately 93 percent of            






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Last modified: May 25, 2011