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Petitioners argue that those security interests provide them
with an ownership interest in the vending machines. Generally, a
security interest is not equivalent to a capital investment.
Helvering v. F. & R. Lazarus & Co., supra; see Cal. Com. Code
sec. 1201(37)(a). The security interests provided petitioners
with an interest in property designed to secure the payment or
performance of an obligation. A security interest does not,
without further action, transfer title or an ownership interest
in property. Moreover, the assignment or release of a security
interest eliminates the secured party's ability (in this case the
financial institutions) to take possession of the property in the
event of default. Additionally, a security interest is not the
equivalent of “cash or other property” used to acquire the
property.12 See sec. 1.1012-1(a), Income Tax Regs.
The transfer of the Crestwood property to Prudential Bancorp
pursuant to the settlement agreement did not create a capital
investment in the vending machines. Instead, it resulted in an
exchange or sale of that property, as discussed infra pp. 30-33.
Prudential Bancorp received the Crestwood property in exchange
11(...continued)
agreements, petitioners provided property or funds in exchange
for the assignment of security interests in the vending machines.
12 This would be so even though, as part of the settlement
agreements in which petitioners received assignment of the
security interests, they did give cash or property to the
financial institutions.
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