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deduction for a business expense, just as it is allowed
a deduction for the expense of renting a building.
Where, however, a corporation pays dividends, it is not
incurring a business expense; it is distributing
profits. While interest and profits are not always
distinguishable, they are distinct concepts, and the
distinction, however imperfect it may be in a
particular case, lies in the degree of risk involved.
Thus, it would do violence to the congressional policy
to permit an "interest" deduction where the "loan" is
so risky that it can properly be regarded only as
venture capital. [Id. at 406-407.]
Applying these principles to the instant cases, we do not
have to set aside or disregard the section 351 transactions as a
prerequisite to evaluating the interest deductions. We must
decide whether the loans as they existed comport with the
legislative intent behind section 163 and, specifically, whether
the funds were advanced with reasonable expectations of repayment
regardless of the success of the venture or whether the funds
were placed at the risk of the business.
According to petitioners' form, after the double section 351
transactions were complete, MSI had $4.4 million worth of assets,
of which approximately $3,670,936 was goodwill, and MDT had
$14 million in assets, of which approximately $13,696,767 was
goodwill. Conversely, MSI's and MDT's tangible assets were
valued at approximately $729,064 and $303,233, respectively.
In exchange for the $729,064 in tangible assets and
$3,670,936 of goodwill, MSI transferred to MTBV stock that it
valued at $1.1 million and a negotiable promissory note valued at
$3.3 million. The note bore interest at 9.5 percent, interest
only paid quarterly. There were several versions of the note
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