- 14 -
Alternatively, petitioner argues that if Intergraph is not
entitled to the claimed foreign currency loss and interest
expense deductions, Nihon Intergraph’s obligation to reimburse
Intergraph for Intergraph’s payment of the overdraft amount
should be treated as worthless, and Intergraph should be entitled
for 1987 to a $6,484,169 bad debt deduction under section 166
with regard thereto.
Respondent argues that the form and substance of the
transaction relating to the overdraft amount establish that the
overdraft amount constituted a loan made to Nihon Intergraph, not
to Intergraph. Respondent therefore argues that Intergraph
should be treated as a mere guarantor of the overdraft amount and
that Intergraph is not entitled to the claimed foreign currency
loss and interest expense deductions.
Generally, whether the form of a loan made to a corporation
should be disregarded and whether the loan should be treated as
made to a shareholder of the corporation, followed by a capital
contribution of the loan proceeds to the corporation, is resolved
in light of traditional debt-equity principles. Santa Anita
Consol., Inc. v. Commissioner, 50 T.C. 536, 550 (1968); Atkinson
v. Commissioner, T.C. Memo. 1984-378. These principles include,
among others, whether the debt obligation relating to the loan
was subordinated to other debt obligations owed by the
corporation, the creditworthiness of the corporation, the
corporation’s payment history on the loan, the prospects that the
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011