Fleming G. and Sherry H. Brooks - Page 11

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          complete transactions as opposed to open account debt.10                    
          Cornelius v. Commissioner, 494 F.2d at 471.  The Court of Appeals           
          stated:                                                                     
                    The real question to be decided is whether each                   
               advance to the corporation by the shareholders and its                 
               corresponding repayment constitute a separate and                      
               complete transaction or whether the indebtedness should                
               be considered as an “open account” whose fluctuations                  
               are to be measured for tax purposes at the end of each                 
               taxable year.  * * * The Tax Court properly determined                 
               that “the 1966 loans and the [1967] repayments thereof                 
               constituted a completed transaction, and the loans                     
               occurring later in 1967 were separate and apart from                   
               such transaction.” * * * [Id.; citation omitted.]                      
          Based on the Tax Court’s finding in Cornelius that the loans were           
          separate transactions and not open account indebtedness, the                
          taxpayers were required to recognize as taxable income the amount           
          of the repayment in excess of the taxpayers’ basis in the advance           
          at the time of repayment, without regard to the basis of a                  
          subsequent advance in the year of repayment.  Cornelius v.                  
          Commissioner, 58 T.C. at 423.  It may be inferred that a netting            
          of advances and repayments during the year would have been proper           
          if the loans had been open account indebtedness rather than                 
          separate transactions.11  Cornelius v. Commissioner, 494 F.2d at            

               10Pursuant to Bonner v. City of Prichard, 661 F.2d 1206                
          (11th Cir. 1981), the precedent of the Fifth Circuit Court of               
          Appeals decided as of Sept. 30, 1981, is followed by the Eleventh           
          Circuit Court of Appeals, the circuit to which an appeal of this            
          case, absent stipulation to the contrary, would lie.                        
               11In Smith v. Commissioner, 48 T.C. 872 (1967), affd. in               
          part and revd. in part on another issue 424 F.2d 219 (9th Cir.              
                                                             (continued...)           





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