Indmar Products Co., Inc. - Page 3

                                        - 3 -                                         
          Rowes wanted to characterize the transfers as loans because the             
          Rowes believed that additional equity in petitioner would                   
          increase their estate tax burden and reduce the amount of                   
          property received by their heirs.  The transfers were unsecured,            
          undocumented, and petitioner agreed to pay a 10-percent return on           
          all transfers from 1987 through 2000.  During this 14-year                  
          period, the prime rate fluctuated between 6 and 9.5 percent for             
          almost 12 years.  Petitioner made monthly payments to the Rowes             
          calculated at 10 percent of the transferred funds (i.e.,                    
          reflected in the “notes payable - stockholders” account balance).           
          The monthly payments represented an investment return and were              
          not repayments of the transfers.  Petitioner’s partial                      
          repayments, however, were sporadic, paid on demand, based on the            
          Rowes’ financial needs, and not subject to set or predetermined             
          due dates.  From 1987 to 2000, the Rowes’ transfers were not                
          repaid in full.                                                             
               Tennessee residents, pursuant to Tenn. Code Ann. sec. 67-2-            
          101 (2000), are taxed on the receipt of dividends and interest.             
          Promissory notes that mature in 6 months or less are, pursuant to           
          Tenn. Code Ann. sec. 67-2-101(1)(B)(i), exempt.  To avoid the tax           
          on interest and dividends, petitioner and the Rowes took the                
          position that the transfers were demand notes.  Petitioner,                 
          however, reported the transfers as long-term liabilities, on its            
          financial statements, to avoid violating loan agreements with               

Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  Next

Last modified: May 25, 2011