- 17 -
Respondent's reply brief then states that
in the case at bar, we are dealing with the question of
debt to equity ratio in the context of a controlled
foreign corporation, a financing subsidiary. The
requirement of adequate capitalization serves as a
major assurance that there is financial reality and
substance to the transaction in the post Moline
Properties, supra, era. [Fn. ref. omitted.]
However, respondent cites no authority for this proposition, nor
does she explain what factors should be used in determining the
existence of "adequate capitalization" in this situation. It
would appear that this is an issue of first impression.
There is nothing in Moline Properties, Inc. v. Commissioner,
319 U.S. 436 (1943), upon which respondent can rely. In that
case, the taxpayer corporation was created and owned by an
individual who had previously purchased real estate that he had
mortgaged. The investment proved unprofitable, and in order to
avoid losing the property, the individual owner was required by
his creditors to transfer title to the newly formed corporation
and place the corporate stock in trust as collateral. See Moline
Properties, Inc. v. Commissioner, 45 B.T.A. 647 (1941), revd. 131
F.2d 388 (5th Cir. 1942), affd. 319 U.S. 436 (1943).
In Moline Properties, Inc. v. Commissioner, supra, the
Supreme Court upheld the Commissioner's position that the
corporate entity to which the real estate was transferred must be
recognized and pay tax on the profit realized when it sold the
real estate. There is nothing in Moline Properties that suggests
Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NextLast modified: May 25, 2011