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interest; (11) a contingency on the obligation to
repay; (12) the source of the interest payments; (13)
the presence or absence of a fixed maturity date; (14)
a provision for redemption by the corporation; (15) a
provision for redemption at the option of the holder;
and (16) the timing of the advance with reference to
the organization of the corporation. [Fin Hay Realty
Co. v. United States, 398 F.2d 694, 696 (3d Cir. 1968);
fn. ref. omitted.]
These factors are only aids to be used in determining
whether the investment constitutes debt or equity. Id. at 697.
The touchstone of economic reality is whether "an outside lender
would have made the payments in the same form and on the same
terms.” Segel v. Commissioner, 89 T.C. 816, 828 (1987). If the
advances "were far more speculative than what an outsider would
make, the payments would be loans in name only." Id. (citing Fin
Hay Realty Co. v. United States, 398 F.2d at 697).
In making our determination, we recognize that heightened
judicial scrutiny is appropriate when shareholders make advances
to their closely held corporations. As the Court of Appeals for
the Third Circuit noted in Fin Hay Realty Co. v. United States,
supra at 697:
Where the corporation is closely held * * * and the
same persons occupy both sides of the bargaining table,
form does not necessarily correspond to the intrinsic
economic nature of the transaction, for the parties may
mold it at their will with no countervailing pull.
This is particularly so where a shareholder can have
the funds he advances to a corporation treated as
corporate obligations instead of contributions to
capital without affecting his proportionate equity
interest. * * *
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