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The principle set down in Gregory is not limited to
situations where the issue is whether or not a transaction is to
be completely ignored for tax purposes. The court in Gilbert v.
Commissioner, 248 F.2d at 406, stated:
The principle is fully as applicable where there is no
doubt that a very real transaction has taken place and
the question is whether the characterization urged by
the taxpayer accords with substantial economic reality.
In either case the taxpayer must show that his
treatment of the transaction does not conflict with the
meaning the Congress had in mind when it formulated the
section sub judice.
The court in Gilbert acknowledged that statutory terms
should not be interpreted independent of their context and
underlying policy, concluding that "not every advance cast in the
form of a loan gives rise to an 'indebtedness' which will justify
a tax deduction." Id. at 440.
In Gilbert v. Commissioner, 248 F.2d at 406-407, the court
addressed the issue of what principle is to be applied by the
finder of facts in determining whether a given advance of money
by a shareholder to a closely held corporation is a loan within
the meaning of the Internal Revenue Code. After evaluating
various criteria, the court stated:
Congress evidently meant the significant factor to be
whether the funds were advanced with reasonable
expectations of repayment regardless of the success of
the venture or were placed at the risk of the business
* * *
From the point of view of the corporation, the
Code allows a deduction for "interest paid * * * on
indebtedness," yet it allows no deduction for dividends
paid. Thus, where a corporation pays for the use of
money which it will return, it is in effect allowed a
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