## Facts

- Alterman Foods, Inc. was a wholesale grocery company that owned all stock of dozens of “Big Apple” supermarket subsidiaries in the Atlanta area during 1966–1974.
- Alterman provided centralized purchasing, warehousing, payroll, accounting, advertising, insurance, and supervision under written management agreements with each subsidiary.
- Under the agreements and course of dealing, subsidiaries turned over gross receipts to Alterman; Alterman paid itself for merchandise and services and recorded the remaining balances as intercompany amounts (accounts payable on the parent’s books; accounts receivable on the subsidiaries’ books).
- These residual balances (“net advances”) grew materially over time.
- Alterman treated the net advances as loans and did not report increases as taxable income.
- The IRS recharacterized increases in net advances as constructive dividends from the subsidiaries to Alterman, taxable to the extent of the subsidiaries’ earnings and profits, assessed deficiencies, and Alterman paid and sued for a refund.
- A prior appellate decision involving tax year 1965 had held substantially similar advances under the same arrangement were dividends rather than genuine debt.

## Issues

1. Whether increases in net advances from wholly owned subsidiaries to Alterman were bona fide loans excludable from income or constructive dividends taxable to Alterman to the extent of subsidiaries’ earnings and profits.

## Decision

- The Court of Claims adopted the trial judge’s findings and recommendation in a per curiam decision.
- The court held the advances were constructive dividends, not bona fide loans.
- The court dismissed Alterman’s refund petition and sustained the IRS deficiencies.

## Legal Principles

- Related-party advances are characterized by their objective economic substance, not by bookkeeping labels or tax-return descriptions.
- Intercompany advances may be treated as constructive dividends when they lack common debt features (e.g., interest, notes, fixed maturity, enforceable repayment rights, repayment history) and the circumstances show no real expectation of repayment.
- Where a parent fully controls the subsidiary “creditor,” the absence of creditor protections and repayment practice supports treating advances as distributions of earnings taxable as dividends to the shareholder-parent (to the extent of earnings and profits).

## Conclusion

The Court of Claims held that Alterman’s subsidiaries’ continuing net advances to the parent functioned as profit distributions rather than true indebtedness, so the increases were taxable constructive dividends and Alterman was not entitled to a refund.


Alterman Foods, Inc. v. United States, 611 F.2d 866 (Ct. Cl. 1979)