Plantation Patterns, Inc. v. Commissioner
United States Court of Appeals for the Fifth Circuit
462 F.2d 712 (1972)
- Written by Matthew Celestin, JD
Facts
New Plantation (plaintiff) was a corporation formed by John S. Jemison, Jr.—along with his investment company—to buy the stock of a separate corporation called Old Plantation. New Plantation’s stock was issued to John’s wife, Marie Jemison, in exchange for $5,000. New Plantation purchased Old Plantation’s stock for approximately $610,000 using a $100,000 cash down payment and interest-bearing notes for the remainder, which were paid from New Plantation’s earnings and personally guaranteed by John. New Plantation considered the notes as debt and therefore deducted the interest paid on the notes from its tax return. However, the Commissioner of Internal Revenue (the Commissioner) (defendant) assessed a deficiency and determined that the notes were not actually debt because John’s guarantee served functionally as an indirect capital contribution. Therefore, the Commissioner determined that New Plantation’s payments on the notes were dividends taxable to John as income and thus that the interest could not be deducted by New Plantation. The tax court agreed with the Commissioner, and New Plantation appealed.
Rule of Law
Issue
Holding and Reasoning (Simpson, J.)
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