Lloyd W. Golder, Jr. And Esther Golder v. Commissioner of Internal Revenue

Taxpayers, Lloyd and Esther Golder, appeal the decision of the United States Tax Court which held that they could not deduct as interest under section 163(a) of the Internal Revenue Code of 1954 (I.R.C.) payments they made as guarantors of corporate obli gations of their closely-held corporation. We affirm.

Facts

The Golders (hereinafter taxpayers) were majority shareholders in a cattle ranch known as Rancho Vistoso, Inc. (hereinafter Rancho Vistoso). Mr. Golder was president of the corporation and a member of its board of directors, and Mrs. Golder was secretary-treasurer and also a member of the board of directors. On June 19, 1965, Rancho Vistoso borrowed $1,500,000 from the Sixty Trust (hereinafter Trust) at an interest rate of 10 percent per annum. The proceeds from the loan were to pay off pre-existing loans from third parties, to finance operations of Rancho Vistoso, and to assist the taxpayers’ son in building a dam on recreation land.

As evidence of the loan, Rancho Vistoso executed four promissory notes secured by mortgages on all real property owned by the corporation at the value of between $1,250,000 and $1,500,000. In addition to the mortgages executed by Rancho…