VHC, Inc. v. Commissioner of Internal Revenue, 110717 FEDTAX, 4756-15

Docket Nº:4756-15, 21583-15
Opinion Judge:KERRIGAN, JUDGE.
Party Name:VHC, INC. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Robert E. Dallman, Daniel B. Geraghty, Thomas R. Vance, Robert M. Romashko, Christina L. Peterson, Robert J. Janssen, Patrick S. Coffey, and Daniel J. Walsh, for petitioner. Christa A. Gruber, Lauren N. May, and Danielle R. Dold, for respondent.
Case Date:November 07, 2017
Court:United States Tax Court
 
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T.C. Memo. 2017-220

VHC, INC. AND SUBSIDIARIES, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 4756-15, 21583-15

United States Tax Court

November 7, 2017

Robert E. Dallman, Daniel B. Geraghty, Thomas R. Vance, Robert M. Romashko, Christina L. Peterson, Robert J. Janssen, Patrick S. Coffey, and Daniel J. Walsh, for petitioner.

Christa A. Gruber, Lauren N. May, and Danielle R. Dold, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KERRIGAN, JUDGE.

CONTENTS

FINDINGS OF FACT .............................................. 5

I. Overview of VHC ............................................ 5

A. VHC's Corporate Structure ................................ 6

1. VOS ............................................. 7

2. Best Built ......................................... 7

3. Spirit Fabs ........................................ 7

4. SCS ............................................. 8

5. VDHE ........................................... 9

B. VHC Ownership and Employees ............................ 9

II. Background on VHC Business and Growth ....................... 12

III. Ronald H.'s Related Companies ................................ 14

A. Nonpaper Companies .................................... 14

B. Paper Companies ....................................... 16

IV. Petitioner's Advances to Ronald H. and His Related Companies ....... 23

A. Petitioner's Initial Advances .............................. 23

B. Petitioner's Guaranties and Bank Loans ..................... 27

1. Associated Bank .................................. 28

2. Nicolet Bank ..................................... 30

3. Baylake Bank ..................................... 32

4. Johnson Bank ..................................... 33

5. Other Banks ...................................... 34

C. Petitioner's Continued Advances .......................... 35

D. Documentation of Advances .............................. 38

E. Collection Efforts ....................................... 44

V. SCS Dispute With Jedson Engineering ........................... 45

VI. VHC's Purchase of Apartments ................................. 47

VII. Petitioner's Tax Returns ....................................... 48

OPINION ....................................................... 50

I. Burden of Proof ............................................. 50

II. Related-Party Bad Debt Deductions ............................. 51

A. Positions of Parties ..................................... 51

B. Bona Fide Debt ........................................ 52

1. Factors Analysis .................................. 54

a. Name Given to Certificates Evidencing Indebtedness ................................ 54

b. Presence or Absence of a Fixed Maturity Date/Failure to Pay on the Due Date ............. 56

c. The Source of Payments ....................... 57

d. Right To Enforce Payments .................... 59

e. Increased Management Participation ............. 60

f. Thin Capitalization/Insolvency/Risk Involved in Making the Advances ....................... 62

g. Use of Advances ............................. 64

h. Success in Obtaining Loans From Outside Lending Institutions .......................... 65

i. Intent of the Parties ........................... 66

j. Payment or Accrual of Interest .................. 70

2. Conclusion ....................................... 70

III. VHC's Alternative Arguments .................................. 71

A. Section 162 Deductions .................................. 71

B. Equitable Recoupment ................................... 75

C. Accrued Interest ........................................ 78

IV. Jedson Dispute .............................................. 79

A. Accrual of Income ...................................... 79

B. Bad Debt Deduction ..................................... 81

V. Interest Expense ............................................. 84

In these consolidated cases, respondent determined the following deficiencies with respect to petitioner's Federal income tax liabilities for tax years 2004-13 (tax years at issue):

Year Deficiency
2004 $2, 507, 262
2005 1, 360, 723
2006 1, 462, 854
2007 929, 853
2008 5, 393, 079
2009 2, 607, 540
2010 3, 437, 475
2011 1, 941, 442
2012 8, 593, 094
2013 4, 259, 288
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the tax years at issue, and all Rule references are to the Tax Court Rules of Practice and Procedure. We round all monetary amounts to the nearest dollar. The issues for consideration are: (1) whether petitioner is entitled to related-party bad debt deductions under section 166 for tax years 2004 and 2006-13; (2) whether alternatively petitioner is entitled to business expense deductions under section 162 for the tax years at issue; (3) whether alternatively petitioner is entitled to recoup taxes paid for closed tax years on amounts it advanced to related parties; (4) whether alternatively petitioner is entitled to recoup taxes paid for closed tax years related to accrued interest; (5) whether alternatively petitioner is entitled to reduce income by the amount of interest income accrued but unpaid; (6) whether petitioner is entitled to an unrelated-party bad debt deduction under section 166 for tax year 2007; and (7) whether petitioner is entitled to interest expense deductions under section 163 for tax years 2009-13.[1] FINDINGS OF FACT Some of the facts have been stipulated and are so found. We incorporate by this reference the stipulation of facts and the attached exhibits. I. Overview of VHC VHC is a Wisconsin corporation with its principal place of business in Green Bay, Wisconsin, when it timely filed its petition. During the tax years at issue VHC was a holding company of five wholly owned subsidiaries (collectively, VHC or petitioner). VHC focused primarily on the paper industry. During the tax years at issue VHC was a family-controlled company which Raymond Van Den Heuvel founded in 1985. Raymond started in the electrical business with his brothers. In 1982 he branched off and formed his own business, VDH Electric (VDHE). He started VHC in 1985. Raymond remained the president of VHC until he retired in 1992. Raymond2 and Patricia are the parents of eight children, including Ronald H., David, Steven, Timothy, and Raymond II. All the sons worked for VHC in different capacities. A. VHC's Corporate Structure During the tax years at issue VHC was a holding company that owned commercial and residential properties and was the sole owner of the following five subsidiaries: VOS...

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