Group Administration Premium Services, Inc., et al. - Page 19

                                       - 19 -                                         

          creditor and a stockholder is that the latter intends to make an            
          investment and take the risks of the venture, while the former              
          seeks a definite obligation, payable in any event."  In Nassau              
          Lens Co. v. Commissioner, 308 F.2d 39, 46 (2d Cir. 1962),                   
          remanding 35 T.C. 268 (1960), the Court of Appeals for the Second           
          Circuit observed that whatever interests a stockholder chooses to           
          take in a corporation, whether debt or equity, should be                    
          recognized as such, "so long as that investment has substantial             
          economic reality in terms of the objective factors which normally           
          surround the type [of investment] chosen", and so long as it                
          complies "with arm's-length standards".  See also Dixie Dairies             
          Corp. v. Commissioner, 74 T.C. 476, 494 (1980) (quoting Estate of           
          Mixon v. United States, 464 F.2d 394, 403 (5th Cir. 1972)                   
          (referring to the need to determine whether "the transaction                
          complies with arm's length standards and normal business                    
          practice")).  These objective factors include the corporation's             
          ability to repay and the likelihood of repayment, as well as                
          whether the parties complied with arm's-length standards and                
          normal business practice.                                                   
               Against this background, it is clear that petitioner's                 
          transfers to GAPS and JJM were capital contributions, rather than           
          debt.  The only evidence of loans is petitioner's and his                   
          accountant's testimony and the "fill in the blank" promissory               
          notes.  However, there were no prepayment schedule, no source               





Page:  Previous  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  Next

Last modified: May 25, 2011