Opinion ID: 489588
Heading Depth: 2
Heading Rank: 1

Heading: Interest Earned by GFS on Certificates of Deposit

Text: 14 P.R. Farms contends that GFS retained proceeds from sales of P.R. Farms' fruit pursuant to a compensation-related loan agreement. Whether an arrangement constitutes a compensation-related loan is a question of fact. We review the Tax Court's factual determinations for clear error. Stern v. C.I.R., 747 F.2d 555, 557 (9th Cir.1984). A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire record is left with the definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948); see also Anderson v. City of Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985). 15 P.R. Farms claims that it realized no income from interest earned on certificates of deposit, or, in the alternative, that any income P.R. Farms realized from investment of sales proceeds was offset by a deduction for cost of brokerage services furnished by GFS. Generally, interest earned on investment is taxable to the person who controls the principal. Helvering v. Horst, 311 U.S. 112, 116-17, 61 S.Ct. 144, 146-47, 85 L.Ed. 75 (1940). In Horst, the Supreme Court deemed interest on bonds taxable to a bond holder even though he transferred the right to receive interest (coupons) to a third party before the interest obligation matured. 16 The record supports the Tax Court's determination that P.R. Farms and Ricchiuti controlled proceeds from fruit sales and, accordingly, any income earned on investment of the proceeds. First, GFS often remitted sales proceeds to P.R. Farms within the same year as fruit was sold, contrary to the parties' brokerage agreements. Second, although P.R. Farms contends that GFS retained proceeds in order to defray operating expenses, the amount of interest income retained by GFS decreased when GFS lowered brokerage fees from 12 cents to 10 cents per box, rather than increasing to compensate for lost revenue. Third, GFS' bookkeepers testified that they paid out or retained sales proceeds at Ricchiuti's direction. Finally, Ricchiuti signed checks from GFS to P.R. Farms. In short, the record indicates that Ricchiuti had authority to direct GFS to transfer all proceeds to P.R. Farms immediately for investment in certificates of deposit. 17 P.R. Farms relies on dicta in Dean v. Commissioner, 35 T.C. 1083 (1961), to the effect that interest-free loans result in no interest income to the lender. Dean, 35 T.C. at 1090. The lenders in Dean, and cases cited therein, exercised substantially less control over debt principal than P.R. Farms and Ricchiuti exercised over proceeds from sales of P.R. Farms' fruit. See Combs Lumber Co., 41 B.T.A. 339, 342-43 (1940); Society Brand Clothes, Inc., 18 T.C. 304, 320-21 (1952). The facts of Horst more closely resemble the facts of this case. 18 P.R. Farms argues that, in the absence of an obligation to allow GFS to retain sales proceeds, Ricchiuti would not have allowed GFS to retain sales proceeds because Ricchiuti held only 50% of GFS's stock while he owned 90% of P.R. Farms. P.R. Farms argues that Ricchiuti would not voluntarily donate 50% of the interest earned on P.R. Farms' income to an unrelated 50% shareholder in GFS. However, Ricchiuti was not the only contributor to GFS. The record does not reflect the extent of similar contributions made by the other 50% shareholder in GFS. These contributions, combined with salary paid to Ricchiuti as vice-president of GFS, may have offset any interest lost by Ricchiuti. 19 P.R. Farms had no legal obligation to allow GFS to retain sales proceeds. The Tax Court properly held that interest on the certificates of deposit was taxable to P.R. Farms.