Uneco, Inc., Matter of
| Citation | 532 F.2d 1204 |
| Decision Date | 21 April 1976 |
| Docket Number | No. 75-1201,75-1201 |
| Parties | 76-1 USTC P 9326 In the Matter of UNECO, INC., Bankrupt. UNITED STATES of America, Appellant, v. UNECO, INC., Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Carolyn Just, Atty., Tax Div., Dept. of Justice, Washington, D. C., for appellant; Daniel E. Wherry, U. S. Atty., Paul Wayne Madgett, Asst. U. S. Atty., Omaha, Neb., Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews and Leonard J. Henzke, Jr., Attys., Washington, D. C., on brief.
Donald J. Buresh, Omaha, Neb., for appellee; Thomas D. Stalnaker, Omaha, Neb., on brief.
Before HEANEY, BRIGHT and WEBSTER, Circuit Judges.
In the bankruptcy proceeding below, the referee allowed a federal claim for income taxes against the bankrupt, Uneco, Inc., in the amount of $191,745.08. The basis of the government's claim was the disallowance of certain bad debt deductions for 1968, 1969, and 1970 which produced an income tax deficiency for 1969. The Internal Revenue Service claimed that certain advances made by Uneco to three affiliated corporations constituted contributions to capital and were not loans, and therefore that Uneco could not properly take bad debt deductions pursuant to Section 166 of the Internal Revenue Code of 1954. 1 Upon review, the District Court reversed the order of the referee, and from that judgment the government appeals.
The parties do not dispute the factual background of the case, but rather disagree upon the weight to be accorded the subjective intent of Uneco in making the advances to its affiliated corporations. The referee ruled that objective criteria were to be considered and were decisive despite the parties' intent; the District Court held that Uneco's subjective intent alone controlled the issue of whether the advances were loans or capital contributions. A proper resolution of the dispute thus requires an examination of the particular facts and a determination of which legal standard must be applied.
The undisputed facts are as follows:
In 1968, Uneco was a successful business whose primary function was the fabrication and manufacture of metal products. Its secondary function was the assembly-line joinder of small components into finished products. Uneco's business was based mainly on contracts with the Department of Defense. In that year, Uneco's management realized that the government contracts would soon terminate and that the company's vitality could be maintained only through diversification. Three separate affiliated corporations were thereafter formed or acquired to implement this policy. Uneco then made advances to these corporations and, when the corporations failed fully to repay the advances, made a claim for bad debt deductions through additions to its bad debt reserve. It is those deductions which IRS disallowed on the ground that the advances were contributions to capital.
Great Plains Smelting and Refining Company was established as an operation for the development and use of a new scrap metal processing procedure in 1968. Great Plains was organized by three officers and major stockholders of Uneco and by a fourth person who owned the rights to a necessary patent and the land where the company was located. Each of the officers contributed $6,000 in cash while the fourth person contributed the patent rights and the land in lieu of $6,000. The total capitalization was thus $24,000. Great Plains was incorporated as a separate entity rather than as a part of Uneco in order to enable it to secure a Small Business Administration loan.
As one of the country's largest producers of brass scrap metal, Uneco had a sizeable brass inventory which it sold to Great Plains. In addition, Uneco made various cash advances to Great Plains. The total amount of the sales and advances from 1968 to 1970 was $193,090.11, of which amount $40,000 was repaid. The advances were carried as accounts receivable by Uneco and there was no other independent evidence of indebtedness. Uneco, at the insistence of its accountants, assigned $69,369.00 of the accounts receivable for these sales as reserved bad debts in 1969. Great Plains subsequently was forced to secure a bank loan, but the bank loaned the money only upon the condition that repayment to Uneco be deferred until the bank loan was fully paid. Uneco acquiesced in this subordination.
Boji Electronics, Inc., a family-owned corporation located in McGregor, Iowa, had valuable contracts for the production of sound speakers. It had, however, suffered severe losses in two floods and a fire and was looking for a new location and a way to re-establish its business. Uneco's president made arrangements with the Boji family for Uneco to purchase 51 percent of the Boji stock and to move the company to the Uneco facilities in Nebraska. From 1968 to 1970, Uneco made advances to Boji for rent, utilities, labor, materials, and other financing. In addition, Uneco guaranteed and repaid part of Boji's Small Business Administration loan. The advances, totalling $285,862.53, were shown on Uneco's books as accounts receivable. Boji repaid $26,869.65 of this amount, but Uneco increased its bad debt reserve by $227,571.00 on account of advances made to Boji.
Unipac, Inc. was incorporated in July, 1968, with a total capitalization of $4,000.00 by three major stockholders of Uneco and two Uneco employees. Unipac was formed in response to the representations of certain individuals that they had a market for molded plastic products, primarily hospital "check-in" kits consisting of various items needed by persons entering hospitals. Because of its expertise in tooling and metal molding procedures, Uneco determined that the molding of plastic products would be compatible with Uneco's other operations. Unipac was separately incorporated, in part, to avoid taking Uneco outside SBA's definition of a small business for purposes of Uneco's contemplated application for a loan. Uneco made advances totalling $207,667.55 to Unipac from 1968 to 1970, of which amount $120,728.52 was repaid. Again, these advances were carried on Uneco's books as accounts receivable.
On its corporate income tax returns, Uneco took bad debt deductions, through additions to its reserve for bad debts, for the outstanding advances it had made to the three affiliates. In January, 1971, Uneco was obliged to file for bankruptcy proceedings, and the Internal Revenue Service subsequently filed a proof of claim against the bankrupt estate for income taxes, claiming that the deductions should not have been allowed since the advances were contributions to capital and not loans. The trustee in bankruptcy objected to the claim, but after hearing evidence, the referee allowed the claim.
The referee specifically found that the actual intent of the parties was to create debtor-creditor relationships, that the parties were not principally motivated by tax avoidance purposes, and that the transactions between Uneco and its affiliates were not contrived as shams or masquerades. The referee concluded, however, that the facts when objectively viewed indicated that the transactions were contributions to capital rather than debts. The referee relied in part upon the high debt-equity ratios and the fact that an outside lender would not have given the affiliates credit in the manner in which Uneco granted credit to them. 2 The District Court reversed the referee's order, holding that the subjective intention of the parties to create a debtor-creditor relationship controlled regardless of the economic realities. The District Court held that this result was mandated by J. S. Biritz Construction Co. v. Commissioner of Internal Revenue, 387 F.2d 451 (8th Cir. 1967). We disagree and reverse the judgment of the District Court.
The bad debt losses claimed by Uneco are allowable in this case only if the unrepaid advances to its affiliates are shown to be bona fide loans. Gifts or contributions to capital are by regulation excluded from bad debt deductions. 3 This much is not disputed. The litigants part company in this case upon the weight to be accorded the customary tests employed in determining the true nature of an unrepaid advance for tax purposes.
In opposing the government's claim, the burden was upon the trustee to demonstrate that the advances were bona fide loans and not contributions to capital. See J. S. Biritz Construction Co. v. Commissioner of Internal Revenue, supra, 387 F.2d at 455; Smith v. Commissioner of Internal Revenue, 370 F.2d 178, 180 (6th Cir. 1966); Wood Preserving Corp. of Baltimore v. United States, 347 F.2d 117, 118 (4th Cir. 1965). Advances between a parent corporation and a subsidiary or other affiliate are subject to particular scrutiny "because the control element suggests the opportunity to contrive a fictional debt". Cuyuna Realty Co. v. United States, 382 F.2d 298, 300-01, 180 Ct.Cl. 879 (1967). Cf. Road Materials, Inc. v. Commissioner of Internal Revenue, 407 F.2d 1121, 1124 (4th Cir. 1969).
In J. S. Biritz Construction Co. v. Commissioner of Internal Revenue, supra, 387 F.2d at 456-57, we recognized that each case turns upon its particular facts and that the varying indicia applied in determining the issue may or may not have relevancy to a particular case. Ten different indicia were identified in Biritz and may be summarized as follows:
(1) Whether the corporation was so grossly undercapitalized that the loans were in fact needed for capital purposes and were actually intended to be risked capital rather than a loan.
(2) Whether the purported loans were made in proportion to equity holdings.
(3) Whether the repayment of the loan was predicated on the success of the venture.
(4) Whether there was a fixed date for payment of the note and a reasonable expectation of payment by that date.
(5) Whether the note was...
To continue reading
Request your trial
-
In re Walters, Bankruptcy No. 89-62082. Adv. No. 91-6073
...Corp., 973 F.2d 265, 269-71 (4th Cir.1992); Resyn Corp. v. United States, 851 F.2d 660, 662-63 (3rd Cir.1988); Matter of Uneco, Inc., 532 F.2d 1204, 1207 (8th Cir.1976); contra: In re Placid Oil Co., 988 F.2d 554, 557 (5th Cir.1993); In re Fidelity Holding Co., LTD., 837 F.2d 696, 698 (5th ......
-
In re Premo
...there are many cases which have held to the contrary. Resyn Corp. v. United States, 851 F.2d 660, 662-63 (3d Cir.1988); In re Uneco, 532 F.2d 1204 (8th Cir.1976); Paschal v. Blieden, 127 F.2d 398 (8th Cir.1942); In re Terrell, 75 B.R. 291, 295 (N.D.Ala.1987), rev'g, 65 B.R. 365 (Bankr.N.D.A......
-
In re Dakota Industries, Inc., Bankruptcy No. 87-40209-PKE.
...burden of producing evidence and persuasion are allocated in a CAWR claim in bankruptcy. An Eighth Circuit opinion, Matter of Uneco, Inc., 532 F.2d 1204 (8th Cir.1976), put the burden of proving taxes as erroneous on the debtor, but the case is distinguished because it was apparently decide......
-
Darr v. United States (In re Telexfree, LLC)
...97 S. Ct. 1176, 51 L.Ed. 2d 582 (1977). The many relevant criteria enumerated in the case law, see, e.g. , id. ; In re Uneco, Inc. , 532 F.2d 1204, 1208 (8th Cir. 1976) ; Smith v. Commissioner , 370 F.2d 178, 180 (6th Cir. 1966), fall roughly into three categories: (1) the intent of the par......