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rate. According to Menards’s books and records, the shareholder
loans account balances at the close of TYE 1998 and TYE 1999 were
$21,057,954 and $31,217,954, respectively. Menards’s financial
statements indicated that Menards possessed cash and marketable
securities at the close of TYE 1998 and TYE 1999 of $138,550,434
and $242,932,229, respectively.
In TYE 1998, Menards capitalized accrued interest of
$639,302 on shareholder loans and claimed the full amount as a
deduction on its tax return. On January 29, 1999, Menards issued
to Mr. Menard a check for the interest. On his 1999 tax return,
Mr. Menard reported that amount as interest income from Menards
for loans outstanding as of December 31, 1998. Mr. Menard did
not report any interest income from loans to Menards on his 1998
tax return.
IV. TMI
TMI is a cash basis taxpayer and has a fiscal year ending
December 31 for tax and financial reporting purposes. At all
relevant times, TMI was an S corporation, owned entirely by Mr.
Menard. Menards and TMI have never held ownership interests in
each other.
A. TMI’s Business and Management
Incorporated in 1992, TMI is in the business of engineering
and racing Indianapolis-style race cars (Indy cars). From 1992
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