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Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the year in issue.
The issue for decision is whether certain payments
petitioner made to its shareholders in 1996 should be treated as
deductible interest on shareholder loans or as nondeductible
dividends on shareholder equity.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner’s principal
place of business was located in Hot Springs, Arkansas.
Petitioner was incorporated in the State of Arkansas on
October 12, 1992, and petitioner began operations in August of
1993. Petitioner manufactures and sells plastic jars and lids
for use primarily in the cosmetic and pharmaceutical industries.
From 1981 to 1987, Lothar Schweigert, petitioner’s principal
shareholder, owned a controlling interest in and was an officer
and employee of Santa Fe Plastics (Santa Fe), a successful
company based in Santa Fe Springs, California, that manufactured
and sold plastic products similar to those manufactured and sold
by petitioner.
From 1981 to 1987, other of petitioner’s shareholders,
officers, and directors (namely Robert TeSelle, William D.
Maffit, Jan A. Strand, and Chris Rakhshan) also were employed in
various capacities at Santa Fe. TeSelle was chief financial
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