Page 166
75 T.C. 166 (1980)
JACK and FLORENCE BAKER, PETITIONERS
v.
COMMISSIONER of INTERNAL REVENUE, RESPONDENT
No. 3914-77.
United States Tax Court
October 22, 1980
T received interest-free loans from a family corporation of which he was an officer-stockholder. Held: T did not realize any taxable income based upon his use or enjoyment of such tax-free loans. Stare decisis requires that Dean v. Commissioner, 35 T.C. 1083 (1961), be followed in the circumstances of this issue, nor is Dean inapplicable on this record by reason of T's investments in federally tax-exempt securities.
Benjamin Lewis, for the petitioners.
Joan Ronder Domike, for the respondent.
OPINION
RAUM, Judge:
The Commissioner determined deficiencies in petitioners' income taxes as follows:
Page 167 After concessions, the only issue presented by this fully stipulated case is whether Jack Baker, the husband petitioner, realized taxable income as a consequence of interest-free loans from Sue Brett, Inc., of which he is the president. He, his wife, and their children own all the issued and outstanding common stock of the corporation. At the time of the filing of their petition herein, petitioners were New York residents. During the years in issue, Mr. Baker maintained a running loan account with the corporation, and used the money borrowed to make estimated tax payments (Federal, State, and city). The loan account was maintained on the corporation's books as " Loans receivable--Officers." There were no notes, no specific plan of repayment, and no interest was charged or paid. During 1973, Mr. Baker made monthly repayments in amounts of $1,000 to $3,000. In 1974, he made one repayment of $50,000, and made no repayments during 1975. In the notice of deficiency, the Commissioner determined that petitioners realized unreported taxable income with respect to the stipulated average balances of the interest-free loans from the corporation (based on specified interest rates), as shown in the following schedule:
| |
Average |
Interest |
Interest |
| Year |
loan balance |
rate |
income |
| 1973 |
$36,870 |
9 |
percent |
$3,318 |
| 1974 |
95,834 |
8 1/2 |
percent |
8,146 |
| 1975 |
52,689 |
7 1/2 |
percent |
3,952 |
The parties have stipulated that at a minimum, Mr. Baker would have had to pay interest at the above rates if he had borrowed from a lending institution. At all times relevant, Sue Brett's accumulated earnings and profits were in excess of the amounts determined by the Commissioner to be the equivalent of interest on the interest-free loans. Mr. Baker's annual salary from Sue Brett, Inc., was
Page 168 $78,000 in 1973 and 1974, and $79,500 in 1975. The parties have agreed that Mr. Baker's compensation from the corporation was not unreasonable and that additional compensation equivalent to the amounts determined by the Commissioner to be additional income to him would not result in unreasonable compensation if paid by the corporation. On December 31, 1972, petitioners owned federally tax-exempt securities totaling $129,000, and during the years 1973, 1974, and 1975, they made investments of $45,000 in each year in federally tax-exempt securities. On December 31, 1975, they owned a total of $245,000 in such securities. The record does not show that there was any correlation in time or otherwise between the investments in the tax-exempt securities and the interest-free loans. In asking us to sustain the deficiencies, the Government recognizes that its position is adverse to
Dean v. Commissioner,
35 T.C. 1083 (1961). It contends that
Dean was wrongly decided and should be overruled. We reaffirm
Dean, and hold further that, on this record,
Dean is not rendered inapplicable by reason of petitioners' investments in federally tax-exempt securities. (1) The Government's frontal attack upon
Dean began in 1973 with the announcement of the Commissioner's " nonacquiescence" in
Dean . 1973-2 C.B. 4. Thereafter, the first case to face the issue squarely in this Court in the context of a stockholder-officer relationship to the corporation was
Suttle v. Commissioner, 37 T.C.M. 1638, 47 P-H Memo T.C. par. 78,393 (1978), which reaffirmed
Dean ....
