Opinion ID: 3010690
Heading Depth: 4
Heading Rank: 1

Heading: Repayments

Text: The Tax Court found that the estate's repayments to the trusts of $82,764 were indicative of a bona fide debt. While the court described the repayments as interest paid to the trusts . . . on loans from the trusts to the estate, it recognized that the payments constituted a portion of the margin interest charged on the trusts' loan from E.F. Hutton, as each of the four repayments corresponded to handwritten notations on the prior month's E.F. Hutton statement calculating the portion of the E.F. Hutton interest charges attributable to the sums advanced to the estate. Geftman, 72 T.C.M. (CCH) at 821. The fact that the estate merely reimbursed the trusts for a portion of interest charges that the trusts incurred from a third party belies the court's conclusion that the trusts received these payments in the capacity of a bona fide creditor. See id.14 Even if the trusts had not owed the $82,764 to the thirdparty lender that provided the capital in this transaction, but rather had received that sum from the estate and retained it as repayment of principal or as payment of interest charged by the trusts themselves, repayment in _________________________________________________________________ 14. The Commissioner asserts, br. at 34, that the estate was to pay the trusts enough to allow the trusts to make a profit after paying the interest charged by E.F. Hutton. The Commissioner concedes that no documents reflect such an arrangement, and relies solely on testimony in which one of the representatives initially made the same assertion, but then, when questioned about the lack of records to that effect, acknowledged, I have to be honest with you. . . . My recollection is it was done at a profit [for the trusts], but if the records do not so reflect, then the trusts were to receive no less than dollar for dollar on the amounts they were charged by E.F. Hutton. App. at 19. This testimony does not support a finding that the trusts were to earn a profit on the transactions. While the Tax Court found that the trusts could not have made their monthly payments to E.F. Hutton unless they had received the payments from the estate, see Geftman, 72 T.C.M. (CCH) at 821, this fact does not elucidate whether the payments properly may be characterized as interest paid on a bona fide debt. 17 that amount would be insufficient to support afinding of a bona fide obligation to repay the $2.85 million transferred to the estate, since repayments which are insubstantial in relation to the amount transferred are not indicative of a bona fide debt. In In re Uneco, 532 F.2d 1204, the transferee repaid $40,000 on a transfer of $193,090; $26,869 on a transfer of $227,571; and $120,728 on a transfer of $207,667, representing repayments of approximately 21%, 12%, and 58%, respectively, for an aggregate repayment of approximately 30% of the total amount advanced. The court found these payments insufficient to establish that the transferee had an unconditional obligation to repay the principal amount transferred. See id. at 1204. Thus, a fortiori, the repayments in this case of $82,764 on a transfer of $2.85 million, representing a repayment of only 3% of the total amount transferred, cannot be regarded as evidence of a bona fide obligation to repay the principal amount transferred. In Gilbert v. Commissioner, 74 T.C. 60, 65-66 (1980), the court held that even complete repayment of the amount transferred was not indicative of a bona fide debt since the repayment occurred after a long period without repayments, and thus did not correspond to repayment terms or schedules established at the outset of the transaction. The pattern of repayments in this case similarly does not reveal any established repayment terms or schedules, as the estate made the repayments only on four occasions from May through August 1984, making no other repayments during the period in which it received transfers from the trusts. In Georgiou, 70 T.C.M. (CCH) at 1351, the court found that repayments were not probative of a bona fide debt as they not only were insubstantial in relation to the advances but also resulted in [f]ailure to repay an ever mounting loan balance. In this case the insubstantial repayments representing only 3% of the amount transferred similarly failed to reduce an ever-mounting loan balance resulting from the fact that the estate received additional transfers of $746,902 during the months in which it made the repayments of $82,764. See app. at 184, 178.15 For _________________________________________________________________ 15. The parties stipulated that [t]he total borrowing on margin as of August 31, 1984 was $2,850,408.34 and that [a]ll funds that were 18 these reasons, the repayments of $82,764 cannot be regarded as evidence of a bona fide debt, in contrast to repayments that are regularly made and result in an annual net reduction in the balance by discharging all stated interest charges and a portion of the principal. See, e.g., Litton Bus. Sys., Inc. v. Commissioner , 61 T.C. 367, 380 (1973).16 Thus, we find that the Tax Court erred in characterizing the $82,764 repayments as evidence of a bona fide debt.