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Trans-Atlantic Co. v. Commissioner of Internal Revenue

decided: November 21, 1972.

TRANS-ATLANTIC COMPANY, APPELLANT,
v.
COMMISSIONER OF INTERNAL REVENUE



Staley, Van Dusen and Max Rosenn, Circuit Judges.

Author: Van Dusen

Opinion OF THE COURT

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. ยง 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:

Class A Class B

Stock Stock Bonds

Benjamin Greenstein $3,750. $11,250. $8,000.

(50 Shs.) (150 Shs.)

Norman Millman 3,750. 11,250. 8,000.

(50 Shs.) (150 Shs.)

Carl Molk 15,000.

Ralph Millman 9,000.

$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:

Benjamin Greenstein

Taxable Year

Ended

January 31 Advances Repayments Balance

1957

1958 ...


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