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balanced out over time because the prime rate fluctuated above
and below 10 percent. The prime rate, however, exceeded 10
percent only from November 28, 1988, to January 8, 1990. Indeed,
the prevailing interest rate was irrelevant. The Rowes simply
wanted to receive a 10-percent return.
II. Petitioner and the Rowes Manipulated Facts and Violated
Legal Agreements
To avoid being subject to the Tennessee 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.
Mr. Holmes readily admitted that the transfers were reported
incorrectly. In addition, petitioner and Mr. Holmes knowingly
mischaracterized the transfers as long-term liabilities to comply
with FTB’s loan agreements.
To justify the reporting of the transfers as long-term
liabilities, petitioner and the Rowes executed annual waivers.
Mr. Rowe, however, testified that he did not consider the waivers
to be legally binding and that the waivers would not prevent
petitioner from repaying him on demand. While the waivers were
disclosed in the financial statements from 1989 to 2000,
petitioner paid the Rowes on demand.
Mr. Rowe also testified that the informal undocumented
agreements with petitioner were consistent with a history of
“handshake deals” he had with petitioner and other business
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