54 T.C. 912 (1970)
B. FORMAN COMPANY, INC., PETITIONER
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
McCURDY & COMPANY, INC., PETITIONER
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
Nos. 468-69, 469-69.
United States Tax Court
May 4, 1970
Ellsworth A. Van. Graafeiland, Peter L. Faber, and William M. Colby, for the petitioners.
Marvin E. Hagen and Stephen M. Miller, for the respondent.
In 1958, petitioners organized Midtown Holdings Corp. for the purpose of constructing and operating an enclosed mall shopping center adjacent to their department stores. They had equal ownership and control of Midtown. The shopping center opened for business in 1962. During the years in issue, Midtown paid no interest on certain loans made to it by petitioners. In addition, petitioners made certain equal payments to Midtown ostensibly to prevent the erection of kiosks in the part of the mall adjacent to their stores. Held, that respondent may not utilize sec. 482, I.R.C. 1954, to impute interest income to petitioners on said loans, since Midtown and petitioners were not controlled, directly or indirectly, by the same interests. Held, further, that, at least by 1962, Midtown had decided in its own interest not to erect kiosks, with the result that purported kiosk-prevention payments constituted disguised capital contributions to Midtown, and not ordinary and necessary business expenses within the meaning of sec. 162, I.R.C. 1954.
Respondent has determined deficiencies in petitioners' Federal income taxes as follows:
| B. Forman Co., Inc
|| Jan. 29, 1966
| McCurdy & Co., Inc
|| Jan. 29, 1966
Only two issues were raised in the petitions: (1) Whether respondent properly imputed to petitioners interest income on certain loans made by petitioners to a corporation, pursuant to section 482; 
and (2) Whether certain payments petitioners made to a corporation in which they were sole and equal shareholders are ordinary and necessary business expenses, deductible under section 162. FINDINGS OF FACT Some of the facts have been stipulated and are so found. Both petitioners are corporations organized under the laws of New York. Each had its principal place of business at Rochester, N.Y., at the time of filing its petition herein. Each petitioner filed its corporate income tax returns for the taxable years herein in issue with the district director of internal revenue, Buffalo, N.Y. McCurdy & Co., Inc. (hereinafter McCurdy's), operates a general department store located on Main Street East in Rochester. B. Forman Co., Inc. (hereinafter Forman's), operates a department store specializing in men's and women's apparel located on Clinton Avenue South in Rochester. The two stores are located on adjacent sides of the same block and are competitors. During all times herein relevant, the stock of McCurdy's was owned primarily by or for members of the McCurdy family. The stock of Forman's was owned by Maurice R. Foreman and by Fred S. Forman or his estate. McCurdy's and Forman's had no shareholders, directors, or officers in common. During the 1950's, the gross sales of Forman's declined rapidly. McCurdy's experience at its downtown store
was similar. These difficulties reflected a general decline in the downtown area of Page 914
Rochester. Since both petitioners owned the land upon which their stores stood, this decline concerned them not only in connection with the prosperity of their businesses, but also in connection with the value of their real estate investment. In 1958, petitioners organized Midtown Holdings Corp. (hereinafter Midtown) for the purpose of constructing and operating an enclosed-mall shopping center adjoining the two stores. This project was intended to revitalize petitioners' business and protect and enhance their real estate investment. On March 23, 1959, petitioners entered into an agreement pertaining to their investment in Midtown. The agreement provided that McCurdy's and Forman's should each have equal representation on the board of directors of Midtown. Provision was made for the designation of an additional odd-numbered director, if either party so requested. Such additional director was to be selected by mutual consent or, if such consent was not forthcoming, by an independent third party. In accordance with the agreement and at the times relevant herein, Midtown had four directors: Gilbert J. C. McCurdy, Gordon W. McCurdy, Maurice R. Forman, and Fred Forman until his death in 1963, when he was replaced by Robert Aex. During the same period, the officers of Midtown were:
|| Gilbert J. C. McCurdy
| Vice President
|| Maurice R. Forman
|| Gordon W. McCurdy
|| Fred Forman (until his death in September
|| 1963). Robert Aex (replaced Fred Forman
| Vice president and general
|| Lynn Johnston (to Apr. 1, 1963). Angelo
|| Chiarella (from May 27, 1963).
The 1959 agreement also provided that stock purchases from Midtown should be made equally by each petitioner and, in accordance with this provision, each petitioner in due course acquired for value an equal number of shares of common stock of Midtown. The agreement further provided, in part, that: VII. The parties hereto agree to loan to Midtown additional amounts so that their aggregate loans to Midtown shall be One Million Dollars ($1,000,000) each, at any time and from time to time, if, prior to January 1, 1965, the Board of Directors of Midtown, by resolution, shall determine that such additional funds in the form of borrowing are necessary or advisable. Loans shall be made equally by the parties. Page 915
Such loans shall be represented by notes, or other evidence of indebtedness, of Midtown, the essential features of which shall be as follows: (A) The notes shall pay interest at the rate of five (5) percent per annum payable semi-annual on the first days of January and July in each year. (B) The notes shall be due and payable thirty (30) years after issuance. (C) Midtown shall have the right to prepay the notes in whole or in part-on any interest paying date prior to maturity upon the payment of the principal amount thereof and accrued interest. (D) The notes may be unsecured but shall not be subordinated to the claims of any other unsecured creditor of Midtown. (E) The notes shall be part of a series, and there shall be no preference between the parties hereto as to payment of the notes of a series. Midtown began construction of the shopping center in 1959. The costs of construction had initially been estimated at $8 million/ they turned out to be far higher, eventually amounting to about $18 million. During 1958 and the first 4 months of 1959, each petitioner made a number of loans to Midtown. On May 1, 1959, these loans were consolidated into single obligations totaling $662,500 to each petitioner in the form of 30-year notes bearing interest at 5 percent. In July 1959, Midtown satisfied these notes, without payment of interest, from the proceeds of a $2,700,000 line of credit established by Midtown with the Lincoln Rochester Trust Co. On September 9, 1960, each petitioner loaned to Midtown $1 million, receiving in return a 3-year note bearing interest at 3 1/2 percent. In April 1961, these notes were canceled without payment of principal or interest and replaced by 3-year notes in the same principal amount, bearing no interest and dated back to September 9, 1960. When the notes fell due, on September 9, 1963, they were replaced by new 3-year notes. These notes were in turn replaced by new 3-year notes on September 9, 1966. None of these notes bore interest and no payments have ever been made on any of them. The loans evidenced by these 1963 and 1966 notes are the subject matter of the interest issue involved in this case. During 1961 through 1963, Forman's loaned an additional $1,445,000 to Midtown, which was fully repaid in December 1964 from the proceeds of loans which Midtown secured from the Lincoln Rochester Trust Co. Also during 1961 through 1963, Gilbert J. C. McCurdy, Virginia G. McCurdy, and Maurice Forman made various loans totaling $1,895,000 to Midtown. These loans also were paid off in December 1964 with the proceeds of a Lincoln Rochester Trust Co. loan. Page 916
The enclosed-mall shopping center was named Midtown Plaza Shopping Center and is hereinafter referred to as Midtown Plaza. Midtown Plaza is constructed around a mall which measures 300 feet north and south and is hereinafter referred to as the mall. Over most of its length, the mall is 110 feet wide, but in the northernmost 90 feet or so there is an alcove opening out to the east which makes the mall close to 200 feet wide. The entire northern border of the mall is taken up by McCurdy's, except for an arcade going through to Euclid Street. Forman's borders the mall on the west, taking up approximately the northern half of the western border. The remaining borders of the mall are occupied by a miscellany of different stores. The mall is entirely roofed over; the decorated ceiling is 45 feet above the main level. There is a terrace level of stores which front on a broad balcony 16 feet above the main level. Forman's has 145 feet of frontage, three entrances, and seven display...