Opinion ID: 489931
Heading Depth: 1
Heading Rank: 1

Heading: Farila and Anglo Dutch Transactions

Text: 5 On May 11, 1969, Nelson executed a reinsurance agreement with Farila, N.V., a Netherlands Antilles corporation, whereby Farila purportedly undertook to become secondarily liable for Bail Bonds' losses arising from bail bond forfeitures. 2 Farila was a system entity effectively controlled by Margolis. As it turned out, Farila never actually reimbursed Bail Bonds for any forfeitures incurred by Bail Bonds. 6 Bail Bonds made two premium payments to Farila: 1) $19,019.43 on March 20, 1970, and 2) $26,403.55 on May 12, 1971. In order to make the premium payments, Bail Bonds obtained two loans from Anglo Dutch Capital Corporation (Anglo Dutch). Anglo Dutch, a California corporation, was a system entity directly controlled by Margolis. The loans were as follows: 1) $15,000 on March 20, 1970, and 2) $25,000 on May 10, 1971. Bail Bonds issued promissory notes to Anglo Dutch, all stating a ten percent interest rate. 7 The proceeds of the $15,000 loan were in essence transferred from Bail Bonds to Farila and then shortly thereafter transferred to Nelson personally. 3 The tax court characterized the transfer as part of the pre-arranged transfer of funds designed to produce a corporate level deduction for [Bail Bonds] with the monies transferred ending up in the hands of [Nelson]. The loan was apparently paid off in three installments to Anglo Dutch in 1970-71. 8 The proceeds from the $25,000 loan were circulated in the space of a few days as follows: 1) $25,000 loan entered in Bail Bonds' books; 2) $26,403.55 check issued by Bail Bonds to Farila as a premium payment; 3) $26,403.55 check deposited in Farila's bank account; 4) $25,000 transferred from Farila's bank account to Anglo Dutch's bank account. Thus, the $25,000 loan from Anglo Dutch circulated right back into Anglo Dutch's hands. 9 A separate money transfer was arranged in order for Bail Bonds to pay off the $25,000 Anglo Dutch loan. In late 1973, two bank accounts were set up in the name of Bail Bonds: account number 00020-16963 (account 16963) and account number 00020-10161 (account 10161). 4 Each account was opened with a $100 deposit advanced by the Margolis office. On December 26, 1973, a check for $27,000--payable to Bail Bonds and signed by Nelson--was written on account 16963. At that time the account contained only $100. The check was deposited in account 10161. On the same day, a check for $26,693 payable to Anglo Dutch was drawn on account 10161. This amount served to pay off the $25,000 Anglo Dutch loan. On December 27, this series of transactions was belatedly funded by the deposit of a $27,000 check into account 16963. The source of these funds is not reflected in Bail Bonds' records. However, the system account maintained by the Margolis office for a system entity called Aruba Bonaire Curacao Trust Co., Ltd. (ABC) shows a $27,000 loan to Nelson on December 27, 1973. Nelson was unable to recall this loan at trial, no promissory notes were introduced at trial to substantiate Nelson's liability for the loan, and no evidence was submitted to show that this loan was repaid to ABC. Thus, it is apparent that the $25,000 Anglo Dutch loan was paid off by circulating $27,000 from ABC to Anglo Dutch. 10 On its federal income tax returns for 1970, 1971, and 1973, Bail Bonds deducted the reinsurance payments to Farila and the interest payments to Anglo Dutch. The payments to Farila were deducted as ordinary and necessary business expenses pursuant to I.R.C. Sec. 162(a). The interest payments to Anglo Dutch were deducted pursuant to I.R.C. Sec. 163(a). The Commissioner of the Internal Revenue Service (the Commissioner) disallowed the deductions. Bail Bonds petitioned the tax court for a redetermination of the deficiencies assessed by the Commissioner.