Taiyo Hawaii Company, Ltd. - Page 18

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          petitioner posed two additional alternative arguments in support            
          of its allegation that respondent's excess interest tax                     
          determination is in error.  Petitioner contends that the advances           
          from related entities were equity rather than debt and, as a                
          second alternative, that section 267(a)(3) prevents the                     
          application of the excess interest tax because the deduction for            
          its interest obligations to the related entities is prohibited.             
          If we do not accept petitioner's primary arguments, petitioner              
          also argues that:  (1) Generally, the excess interest tax                   
          violates the nondiscrimination clause of the treaty, and/or (2)             
          certain properties held by petitioner were not U.S. trade or                
          business assets for purposes of calculating the excess interest             
               Debt vs. Equity--We first address petitioner's contention              
          that the advances in question were equity rather than debt.                 
          Petitioner, taking the position ordinarily advanced by                      
          respondent, argues that there is no deductible interest based on            
          statutory (section 385) and case law concerning the debt versus             
          equity issue.  If the advances are not debt for Federal income              
          tax purposes, as petitioner contends, there could be no                     
          deductible interest expense on the advances and no liability for            
          the excess interest tax imposed by section 884(f)(1)(B).                    
          Conversely, respondent argues that the debt versus equity issue             
          should be decided in favor of debt, rather than equity.                     

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