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The Lucky Kirt Trust loans to Mr. Lundgren and petitioners’
daughter will not be respected as bona fide loans. A bona fide
loan requires a debt-creditor relationship and the expectation of
repayment. Fisher v. Commissioner, 54 T.C. 905, 909-910 (1970).
The Court considers the following factors as relevant here in
determining whether a valid debtor-creditor relationship existed:
(1) Whether the purported loan was evidenced by a written
promissory note; (2) whether a reasonable market rate of interest
was charged; (3) whether a schedule for repayment or a stated
maturity date was established; (4) whether security or collateral
for the loan existed; and (5) whether the loan was actually
repaid by the stated maturity date. Clark v. Commissioner, 18
T.C. 780, 783 (1952), affd. 205 F.2d 353 (2d Cir. 1953); Meier v.
Commissioner, T.C. Memo. 2003-94.
The loans from Lucky Kirt Trust to Mr. Lundgren and
petitioners’ daughter did not contain any of the elements that
would support the creation of a bona fide loan. Because of the
relationship between petitioners and the trust, these transfers
will be highly scrutinized. See Clark v. Commissioner, supra at
783 (holding that “intrafamily transactions are subject to rigid
scrutiny”). The loans are conclusive evidence that in practice
the trust was petitioners’ alter ego, and petitioners were not
bound by the restrictions of the trust, if there really was one,
or the law of trusts.
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