Philip E. And Joan Bauer, Federal Meat Co. And Phillip and Ruth Himmelfarb v. Commissioner of Internal Revenue

This case concerns a determination of whether cash payments by two stockholders to their wholly-owned corporation were loans or contributions to capital. The Commissioner of Internal Revenue contended that the payments by the stockholders were contributions to capital and not loans, as the stockholders and the corporation maintained. The documentation between the parties and the books of the corporation reflected the cash payments as loans and the periodic payments by the corporation as principal and interest payments to the stockholders. The corporation deducted the interest payments and the stockholders declared the interest payments as income and treated the principal payments as a return of capital. The Commissioner contended that because the stockholders’ cash advances to the corporation were contributions to capital and not loans, the corporation could not deduct the claimed interest and the stockholders were required to treat the payments made to them as taxable dividends. The Commissioner assessed deficiencies accordingly. The stockholders and the corporation contested the assessments in the Tax Court and the cases were consolidated for trial. The Tax Court held for the…