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creditor relationships reflecting enforceable and unconditional
obligations to repay fixed sums of money. Sec. 1.166-1(c),
Income Tax Regs. Contributions to the capital of corporations
and other equity investments in corporations do not constitute or
qualify as bona fide debts. Kean v. Commissioner, 91 T.C. 575,
594 (1988).
The question of whether transfers of funds to closely held
corporations constitute debt or equity must be decided on the
basis of all the relevant facts and circumstances, and taxpayers
generally bear the burden of proving that the transfers
constituted loans by the taxpayers to the corporations and not
equity investments. Rule 142(a); Dixie Dairies Corp. v.
Commissioner, 74 T.C. 476, 493 (1980).
Various factors are often used to analyze whether funds
transferred to closely held corporations are to be treated as
debt or equity: (1) The treatment of the funds on documents
prepared by the parties to the transaction; (2) the presence or
absence of fixed due dates for repayment of the funds; (3) the
likely source of repayment of the funds; (4) efforts to enforce
repayment of the funds; (5) participation by the transferor of
the funds in management of the corporation; (6) whether the
transferor subordinated right of repayment to the corporation’s
other creditors; (7) the intent of the parties; (8) whether the
transferor of the funds was also a shareholder of the
corporation; (9) the capitalization of the corporation;
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