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OPINION
A. Whether the $350,000 Petitioner Transferred to Swirl
Was Debt or Equity
1. Background and Contentions of the Parties
Petitioner transferred $350,000 to Swirl on October 27,
1986. He deducted $308,000 of that amount as a bad debt on his
1988 return. Sec. 166(a)(1). Respondent determined and contends
that the $350,000 payment was a capital contribution.3
Whether a payment to a corporation is a contribution to
capital or a loan is a question of fact. Gilbert v.
Commissioner, 262 F.2d 512, 513 (2d Cir. 1959), affg. T.C. Memo.
1958-8. The substance and not the form of the transaction
controls. Gregory v. Helvering, 293 U.S. 465 (1935); 1432
Broadway Corp. v. Commissioner, 160 F.2d 885 (2d Cir. 1945),
affg. 4 T.C. 1158 (1945). We apply special scrutiny because
petitioner transferred the funds in issue to his closely held
corporation. Fin Hay Realty Co. v. United States, 398 F.2d 694,
697 (3d Cir. 1968).
The factors we consider in deciding whether payments to a
corporation are debt or equity include: (a) The name given to
the certificate evidencing the indebtedness; (b) whether there is
a fixed maturity date; (c) whether the party providing the funds
3 Respondent concedes that, if the $350,000 is debt,
petitioner may claim a business bad debt deduction under sec.
166(a).
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Last modified: May 25, 2011