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transactions. Petitioners argue that the section 351
transactions established an unconditional obligation to pay and
that the promissory notes were valid debt notwithstanding the
year-long delay in finalizing the notes.
Respondent contends that the amounts in issue should be
treated as equity because petitioners lacked the intent and
ability to repay the funds, and, therefore, the funds were at the
risk of the business.
The classic debt is an unqualified obligation to pay a sum
certain at a reasonably close fixed maturity date along with a
fixed percentage in interest payable regardless of the debtor's
income or lack thereof. Gilbert v. Commissioner, 248 F.2d 399,
402 (2d Cir. 1957), remanding T.C. Memo. 1956-137 on another
issue, affd. 262 F.2d 512 (2d Cir. 1959).
In Gregory v. Helvering, 293 U.S. 465 (1935), the Supreme
Court disregarded a corporate reorganization because, although
the transaction was in form a reorganization, in substance there
was no business purpose other than tax avoidance. The Court
recognized the legal right of a taxpayer to decrease the amount
of taxes owed by means that the law permits. However, the Court
qualified the right of the taxpayer to reduce taxes, stating "But
the question for determination is whether what was done, apart
from the tax motive, was the thing which the statute intended."
Id. at 469.
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