PARKS AND LONG v. Commissioner

• Decision Date: 15 September 1980
• Docket Number: Docket No. 1723-77.
• Citation: 40 TCM (CCH) 1228,1980 TC Memo 382
• Parties: Haworth H. Parks, Lawrence V. Long and Peggy J. Long, and Estate of Kenneth R. Meguiar, Deceased, Maxine G. Meguiar, Executrix, and Maxine G. Meguiar v. Commissioner.
• Court: U.S. Tax Court

40 TCM (CCH) 1228

1980 TC Memo 382

T.C. Memo. 1980-382.

Haworth H. Parks, Lawrence V. Long and Peggy J. Long, and Estate of Kenneth R. Meguiar, Deceased, Maxine G. Meguiar, Executrix, and Maxine G. Meguiar v. Commissioner.

Docket No. 1723-77.

United States Tax Court.

Filed September 15, 1980.

William H. Lassiter, Jr., 24th Floor, L & C Tower, Nashville, Tenn., for the petitioners. Wm. Robert Pope, Jr., for the respondent.

Memorandum Opinion

STERRETT, Judge:

By statutory notices dated November 24, 1976 respondent determined deficiencies in income taxes paid and additions to tax under section 6651(a) by petitioners, Haworth H. Parks, Lawrence V. and Peggy J. Long, and Kenneth R. (now deceased) and Maxine G. Meguiar as follows:

                                    Haworth H. Parks
                                            I.R.C. sec
                  Year         Deficiency   6651(a)(1)     Total
                  1972 .....    $1,910.02     $283.19   $ 2,193.21
                  1973 .....     2,317.94                 2,317.94
                  1974 .....     1,943.73                 1,943.73
                                 ________     _______    _________
                                $6,171.69     $283.19   $ 6,454.88
                                 Lawrence V. Long, et ux
                  1972 ......   $  692.69     $173.17   $   865.86
                  1973 ......      817.21                   817.21
                  1974 ......      281.23                   281.23
                                _________    _______   ___________
                                $1,791.13     $173.17   $ 1,964.30
                                Kenneth R. Meguiar, et ux
                  1972 ......   $  746.02     $186.50   $   932.52
                  1973 ......      758.80                   758.80
                  1974 ......      159.64                   159.64
                                 ________     _______     ________
                                $1,664.46     $186.50   $ 1,850.96
                                 ________     _______    _________
                  TOTALS        $9,627.28     $642.86   $10,270.14
                

After concessions the only issue remaining for our decision is whether petitioners received income by virtue of having been the recipients of various interest-free loans from their corporation during the taxable years in issue.

All of the facts were stipulated and are so found. The stipulation of facts and the exhibits attached thereto are incorporated herein by this reference.

At the time their petition herein was filed, petitioners resided in Nashville, Tennessee.¹ Petitioners filed their Federal income tax returns on a cash-basis for the taxable years ended December 31, 1972, 1973 and 1974 with the Internal Revenue Service Center at Memphis, Tennessee.

Petitioners Haworth H. Parks, Lawrence V. Long and Kenneth R. Meguiar were shareholders, directors and officers of the corporation known as Parks, Inc., during the years in issue. During the years 1972 through 1974 the amount of stock owned by each of the stockholders of Parks, Inc., was as follows:

                      Name of                   Number    Percentage
                    Stockholder               of Shares    of Total
                  Haworth H. Parks ........    45,900        58.6
                  Kenneth R. Meguiar ......    10,800        13.8
                  Lawrence V. Long ........    10,800        13.8
                  James W. Ralston ........     3,600         4.6
                  Kenneth Bryant ..........     3,600         4.6
                  Kenneth S. Patterson ....     3,600         4.6
                                               ______
                                               78,300
                

On June 8, 1974, the corporation redeemed all of Mr. Patterson's stock.

Under the authority of a corporate resolution passed October 2, 1966, Parks, Inc., made open account loans to the petitioners who were officers of the corporation. No interest was charged by Parks, Inc., on any amount loaned to the petitioners/officers. Further petitioners did not pay any interest on the amounts loaned to them.

Applying the average prime interest rate to the average monthly balance of the loans for each of the petitioners during the years involved, reducing the product by the $100 dividend exclusion for the years 1973 and 1974, respondent concluded that the following adjustment should be made to petitioners' taxable income as a result of the economic benefit received from the interest-free loan:

                  Years        Mr. Parks   Mr. Long    Mr. Meguiar
                  1972 .....   $2,455.63   $1,297.04    $  948.03
                  1973 .....    4,826.61    2,228.14     1,553.10
                  1974 .....    3,771.54      896.91       319.95
                

During the years at issue each petitioner had an outstanding balance on the sums borrowed from Parks, Inc. No interest was charged or paid for the use of those funds. In these years, the petitioners were officers, members of the board of directors, and salaried employees of Parks, Inc. It is respondent's position that each of the petitioners realized an economic benefit, and thus taxable income, from their interest-free use of the corporation's funds. Respondent measures that economic benefit by the interest rate at which such sums could have been borrowed in an arms-length transaction.

Respondent concedes that the decision of the present case is controlled by Dean v. Commissioner Dec. 24,742, 35 T.C. 1083 (1961) as explained by Greenspun v....