Karns Prime & Fancy Food, Ltd. - Page 21

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          obligation (i.e., an obligation that is not subject to a condi-             
          tion precedent) on the part of the transferee to repay, and an              
          unconditional intention on the part of the transferor to secure             
          repayment of, such funds.  Haag v. Commissioner, 88 T.C. 604, 616           
          (1987), affd. without published opinion 855 F.2d 855 (8th Cir.              
          1988); see also Frierdich v. Commissioner, 925 F.2d 180, 185 (7th           
          Cir. 1991), affg. T.C. Memo. 1989-393; Clark v. Commissioner, 18            
          T.C. 780, 783-784 (1952), affd. per curiam 205 F.2d 353 (2d Cir.            
          1953).  Whether a transfer of funds constitutes a loan may be               
          inferred from objective characteristics surrounding the transfer,           
          including the presence or absence of a debt instrument, collat-             
          eral securing the purported loan, interest accruing on the                  
          purported loan, repayments of the transferred funds, and any                
          attributes indicative of an enforceable obligation to repay the             
          funds transferred.  See, e.g., Haag v. Commissioner, supra at               
          615-616 & n.6.  In determining whether a transfer of funds                  
          constitutes a loan, the substance, and not the form, of the                 
          transaction is controlling for tax purposes.  See, e.g., Knetsch            
          v. United States, 364 U.S. 361, 365-366 (1960).                             
               In support of its position that the $1.5 million at issue              
          constitutes a loan, petitioner argues:                                      
                    The advance from Super Rite on April 15, 1999                     
               created an unconditional obligation to repay those                     
               funds.  It was only a condition subsequent, i.e. ful-                  
               filling the obligations under the Supply and Require-                  
               ments Agreement, on an annual basis, that gave rise to                 
               the forgiveness of the annual debt service payment.                    





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