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loan transactions that occurred in 1993, 1994, and 1995.14 The
repayments did not follow the procedures specified in the
promissory note; i.e., payment 375 days after demand.15 The
repayments occurred all at once and via the same circular route
as the initial disbursements. Mr. Oren simply endorsed the
checks he received from HL and HS over to Dart. The interest
payments, like the disbursements and repayments, were wholly
circular. The interest payments from Mr. Oren to Dart, from HL
and HS to Mr. Oren, and from Dart to HL and HS, were in the same
amounts and were made contemporaneously. The interest payments,
like the disbursements and repayments, were economically
14At trial, Mr. Oren testified as follows:
Q And what did your tax adviser recommend to you once
they found out the IRS was challenging these loans?
A Well, they recommended that Dart pay a dividend to me
and that I use that dividend to pay off the loans to
Highway Sales and Highway Leasing, and so at that point
all the loans were repaid.
15Petitioners suggest that the repayment method adopted
should not affect the substance of the original distribution of
funds. However, as we see it, the substance of the loan
transactions should be determined on the basis of all facts and
circumstances, including the circumstances surrounding repayment.
Petitioners also argue that the repayment of the loans was “fully
consistent with sound commercial practice.” However, Mr. Oren’s
testimony at trial and the record show that the only reasons for
the repayments were to unwind the previous transactions and to
salvage whatever tax results might be forthcoming for taxable
year 1996.
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