Justia Federal District Court Opinions

This is an appeal from a decision of the United States Tax Court, 58 T.C. 496, favorable to the taxpayer. The Tax Court rejected the Commissioner's allocation, under 26 U.S.C. Sec. 482, of interest income to a parent corporation as a result of interest free loans made by the parent to its subsidiaries. We reverse with directions to enter judgment in favor of the Commissioner.

The Kahler Corporation (Kahler) has for many years owned and operated a hotel in Rochester, Minnestota. In the early 1960's Kahler established seven wholly owned subsidiaries to operate and manage new hotel or motel properties outside of Rochester. These subsidiary corporations were funded by Kahler. A small portion of the required capital was contributed by Kahler in exchange for all of the stock of the subsidiary. The balance of the required capital was loaned by Kahler on an interest free basis. These advances had no fixed maturity date but were reflected as debts on the books of both the parent and the subsidiaries and were repaid without interest from time to time thereafter.

During the taxable years here involved, 1965 and 1966, four of these subsidiaries were indebted to Kahler in the following amounts:

Dec. 31, 1964 Dec. 31, 1965 Dec. 31, 1966

K.F.M. $ 325,000 $ 315,000 $ 293,000

Mankato 865,000 785,000 1,195,000

Oak Manor none 335,000 215,000

Owatonna 485,000 425,000 385,000