Citation. 35 T.C. 1083, 1961 U.S. Tax Ct.
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Petitioners were majority owners of a holding company, Nemours Corporation. The corporation gave an interest free loan in excess of $2 million to Petitioners.
Synopsis of Rule of Law.
Interest free loans result in no taxable gain to the borrower.
Facts.
Petitioners, J. Simpson Dean and Paulina Dean, filed joint tax returns as husband and wife from 1955 and 1956. Petitioners owned the stock of the Nemours Corporation. The Petitioners gifted 2000 shares of Nemours stock to a trust for their children. Petitioners owed large amounts to Nemours on non-interest bearing loans. The Commissioner of Internal Revenue sought deficiencies alleging Petitioner received income from the interest free loans.
Issue.
Whether Petitioners realized taxable income from the alleged economic benefit from the interest free use of funds which they borrowed from the family corporation which they controlled?
Held.
Judge Raum issued the opinion for the Tax Court in holding that the Petitioners did not realize taxable income.
Dissent.
Justice Bruce issued a dissenting opinion arguing that the interest free loan in this case resulted in an economic benefit to the borrower. Further, the loan was to Petitioner by the corporation in which they were majority stockholders. The generalization laid out by the court was too broad.
Concurrence.
Justice Fisher concurred in the result.
Justice Opper issued a concurring opinion in which Justices Tietjens, Withey and Drennen joined. Justice Opper noting the he felt the rule that interest free loans are not taxable was too broad of a generalization.
Discussion.
The Tax Court points out that had the interest been charged it would have been fully deductible by Petitioners. Further, the Tax Court notes that an interest free loan is not the same as use of property rent free, which would be taxable income.
