- 4 - 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 $1,105,169. 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 andPage: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Next
Last modified: May 25, 2011