Kreimer v. Commissioner

This case consolidated two actions involving Harry Walsh and Stanley and Betty Kreimer (Kreimer) (plaintiffs), who formed several companies together in 1969 to establish an insurance-surety company. The entities established were Mount Vernon Investment Company (Investment), Mt. Vernon Surety Company (Surety), and Mt. Vernon Insurance Agency (Agency). Kreimer obtained additional outside investors to establish these businesses. Kreimer sought reinsurance, or insurance on the very surety bonds that the Kreimers planned for Surety to write. Kreimer obtained reinsurance from two different companies. Not long after, disagreements arose among Walsh, the Kreimers, and the outside investors. Walsh and the Kreimers agreed to sell all of their stock in Investment and, in return, purchase the other stock in Surety and Agency. Walsh and the Kreimers also agreed to pay $675,000 for the Surety and Agency stock, with the remaining purchase price being the Investment stock. Then, to borrow most of the $675,000, Walsh and the Kreimers had others pose as borrowers with one of the companies they bought reinsurance from guaranteeing bonds on the loans. The money would ultimately go to Walsh and the Kreimers. This was illegal and fraudulent, but Walsh and the Kreimers pleaded that they intended to pay back the loans, and Walsh and the Kreimers actually did so. The concern was whether receiving the various loans was income to Walsh and the Kreimers. The Commissioner of Internal Revenue (the commissioner) (defendant) took the position that the loans were income by virtue of the illegal activity involved, which meant the funds were not a legitimate loan.