Indmar Products Co., Inc. - Page 4

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          First Tennessee Bank (FTB) (i.e., petitioner’s main creditor)               
          requiring petitioner to maintain a certain ratio of current                 
          assets to current liabilities.                                              
               In 1989, petitioner’s accountant, Wesley Holmes, decided               
          that petitioner needed documentation to support the reporting of            
          the transfers as long-term liabilities.  Mr. Holmes determined              
          that the transfers could be reported as long-term liabilities if            
          the Rowes signed a waiver agreeing to forgo repayment for at                
          least 12 months.  From 1989 through 2000, the notes to                      
          petitioner’s financial statements disclosed that “The                       
          stockholders have agreed not to demand payment within the next              
          year”, and in 1992 and 1993, the Rowes signed written agreements            
          stating that they would not demand repayment of the transfers               
          (waivers).  Despite these disclosures and agreements, the Rowes             
          demanded and received seven partial repayments totaling                     
               Petitioner recorded in its books and records, all transfers            
          as “notes payable - stockholders” and reported, on its Federal              
          income tax returns, the monthly payments to stockholders as an              
          interest expense deduction.  Consistent with petitioner’s                   
          treatment of the monthly payments, the Rowes reported (i.e., on             
          their individual income tax returns), these payments as interest            
          income.  Outstanding “notes payable - stockholders” delineated in           
          petitioner’s 1986 financial statements totaled $209,500 and                 

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Last modified: May 25, 2011