Staley, Van Dusen and Max Rosenn, Circuit Judges.
VAN DUSEN, Circuit Judge.
The question in this case is whether payments made on various obligations of Trans-Atlantic were deductible as interest under 26 U.S.C. § 163(a) (1970) or were in reality disguised dividends.*fn1 The Commissioner determined that they were dividends, and, therefore, assessed deficiencies of $7,849.50, $7,336.73, and $6,662.61 for the taxable years ending January 31, 1964, 1965, and 1966. The Tax Court affirmed, T.C. Memo 1970-307, 29 CCH Tax Ct.Mem. 1414 (1970), and Trans-Atlantic appeals that decision.*fn2
Before Trans-Atlantic's incorporation on February 1, 1956, the business of importing and jobbing hardware had been carried on as a partnership composed of Benjamin Greenstein, Norman Millman, and Carl Molk, all of whom are related. Greenstein had contributed to capital about $21,400, and loaned about $1,600.; Millman had contributed about $24,000, and loaned $500. Upon the incorporation, Greenstein and Millman retained equity positions; Molk became strictly a creditor; and Ralph Millman, a former creditor of the partnership, became a creditor of Trans-Atlantic. Also on February 1, 1956, Trans-Atlantic issued 10-year bonds bearing interest at 10%.*fn3 Trans-Atlantic's initial capital and liability structure was as follows:
Benjamin Greenstein $3,750. $11,250. $8,000.
Norman Millman 3,750. 11,250. 8,000.
$7,500. $22,500. $40,000.
The Class A and Class B stock were identical except that the latter was nonvoting.*fn4 On February 1, 1966, $10,000. worth of the bonds were redeemed and the maturity date of the remaining was extended for one year; however, at the time of the Tax Court trial, these bonds were apparently still outstanding.
In March 1956, Greenstein divided his bonds equally between his 15-year old son and 17-year old daughter. In February 1959, Millman put his bonds in long-term trusts for his son, then 11, and for his daughter, then one.
During the years after the incorporation of Trans-Atlantic, Greenstein and Millman made advances, in addition to the bonds they already held, in the form of unsecured promissory notes, as follows:
January 31 Advances Repayments Balance