Shareholder Guarantees and Plantation Patterns vs Commissioner

Plantation Patterns vs Comissioner Case on Shareholder Guarantees

  • John Jemison Jr. and Jemison Investment Company, of which Jemison was the president and controlling shareholder, formed a new corporation, New Plantation, to purchase all of the stock of Old Plantation from unrelated individual
  • All of the stock of New Plantation was issued to Mrs. Marie Jemison in exchange for $5,000
  • Mr. Jemison was active in the business of New Plantation and Mrs. Jemison was not active
  • New Plantation obtained a loan from Bradford and Company for $150,000 in exchange for a 6 ½% debenture subordinated to all other debt of New Plantation and not guaranteed
  • Bradford loaned the money to New Planation to induce Jemison to hire his son at New Plantation
  • The stock of Old Plantation was acquired for $100,000 cash and 5 ½% notes in the principal amount of $610,000
  • These notes were guaranteed by Jemison and Jemison Investment Company
  • With the exception of $100,000 of the notes, they were subordinated to all creditors of New Plantation excluding Bradford and Company
  • The IRS disallowed New Plantation’s interest expense associated with the 5 ½% notes and claimed that Jemison and Jemison Investment Company had made an equity contribution to New Plantation and such equity contribution was used to acquire the stock of Old Plantation

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