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While the analysis would vary, depending on whether the
investment in the corporation were debt or equity, the net tax
effect to petitioner would be the same. If petitioner's
investment in the corporation were a loan, WSAI's transfer of
property to petitioner in satisfaction of the loan would not be
governed by section 331 to that extent. This is because the
transfer would not be “in payment for” petitioner's stock. In
such a case, the corporation merely would be repaying the loan,
receiving equal value in exchange for the transfer, resulting in
no taxable event for the transferee. See Citizens Bank & Trust
Co. v. United States, 217 Ct. Cl. 606, 580 F.2d 442 (1978); J.
Hofert Co. v. United States, 23 AFTR 2d 69-845, 69-1 USTC par.
9220 (C.D. Cal. 1969).
If petitioner's investment were equity, petitioner would be
entitled to increase his basis in his WSAI shares by the amount
of the investment. Under this scenario, petitioner would
subtract his basis from the amount of the distribution; if the
distribution should exceed petitioner's basis, the excess would
be treated as capital gain from sale of the stock.
In Donisi v. Commissioner, 405 F.2d 481, 483 (6th Cir.
1968), affg. T.C. Memo. 1967-62, the court noted that, although
the intention of the parties weighs heavily in determining
whether advances are loans, proof of such intent is to be found
in “the arrangements concerning the normal security, interest and
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