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For Federal income tax purposes, a transaction will be
characterized as a loan if there was “an unconditional obligation
on the part of the transferee to repay the money, and an
unconditional intention on the part of the transferor to secure
repayment.” Haag v. Commissioner, 88 T.C. 604, 616 (1987), affd.
without published opinion 855 F.2d 855 (8th Cir. 1988). The
parties’ intent that the loan be repaid is the controlling factor
in determining whether payments should be termed loans. See
Berthold v. Commissioner, 404 F.2d 119, 122 (6th Cir. 1968).
Courts have focused on certain objective factors to identify bona
fide loans, including: (1) The existence or nonexistence of a
debt instrument; (2) provisions for security, interest payments,
and a fixed payment date; (3) treatment of the funds on the
corporation’s books; (4) whether repayments were made; (5) the
extent of the shareholder’s participation in management; and (6)
the effect of the “loan” on the transferee’s salary. Haber v.
Commissioner, 52 T.C. 255, 266 (1969), affd. 422 F.2d 198 (5th
Cir. 1970). When the individual is in substantial control of the
corporation, special scrutiny of the situation is necessary.
Id.; Roschuni v. Commissioner, 29 T.C. 1193, 1202 (1958), affd.
271 F.2d 267 (5th Cir. 1959).
Mr. Lenzen and Mr. Schoenecker made bona fide loans to RAF.
RAF’s 1999 corporate income tax return and financial statements
reflect that $535,544 was owed to stockholders at the end of
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Last modified: May 25, 2011