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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
$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 and
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Last modified: May 25, 2011