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recorded on Sidal’s adjusted trial balances as notes payable
(“N/P”) to Paulan; but those payments were reclassified at
yearend on those trial balances as notes payable (“N/P”) to
petitioners (one-half of each payment constituting a note payable
to each petitioner). We assume corresponding entries and yearend
adjusting entries were made on Paulan’s 1999 and 2000 adjusted
trial balances (which are not in evidence) to convert receivables
from Sidal into receivables from petitioners.
Because the 1997 and 1998 Paulan direct payments were always
reflected on Sidal’s and Paulan’s books as giving rise to notes
payable from Sidal to Paulan, those accounting entries furnish no
support for treating those payments as, in substance, back-to-
back loans from Paulan to petitioners and from petitioners to
Sidal. The issue with respect to the 1999 and 2000 Paulan direct
payments is whether the yearend adjusting entries alone justify
such back-to-back loan treatment for those payments. We find
that they do not.
In both Yates v. Commissioner, T.C. Memo. 2001-280, and
Culnen v. Commissioner, T.C. Memo. 2000-139, we reviewed
accounting systems that entailed temporary postings or entries by
a bookkeeper reflecting direct loans from the taxpayer’s
controlled entity to an S corporation in which the taxpayer was a
shareholder (which entries were consistent with the actual
cashflow), followed (before yearend) by adjusting entries
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