40 T.C.M. (CCH) 1228
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, Petitioners
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
September 15, 1980
Petitioners, officers and shareholders of Parks, Inc., received interest-free loans from the corporation. Held: Loans of money, interest-free, do not create taxable income to the borrowers. Dean v. Commissioner, 35 T.C. 1083 (1961) and Greenspun v. Commissioner, 72 T.C. 931 (1979) followed.
William H. Lassiter, Jr., for the petitioners.
Wm. Robert Pope, Jr., for the respondent.
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:
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.
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 Stockholder
|| Number of Shares
|| Percentage of Total
| Haworth H. Parks
| Kenneth R. Meguiar
| Lawrence V. Long
| James W. Ralston
| Kenneth S. Patterson
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 adjustments should be made to petitioners' taxable income as a result of the economic benefit received from the interest-free loan:
|| Mr. Parks
|| Mr. Long
|| Mr. Meguiar
|| $ 948.03
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, 35 T.C. 1083
(1961) as explained by Greenspun v. Commissioner, 72 T.C. 931
(1979), on appeal (9th Cir. November 20, 1979). Thus respondent asked this Court, again, to reverse our decision in Dean. As we said...