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Respondent, however, raises the threshold question of whether
petitioner should be allowed to disavow the form of the
transaction, which was cast as debt. In this regard, respondent
agrees that if we find the advances were equity (and not debt),
the matter would be resolved in petitioner's favor. Petitioner
bears the burden of proof. Rule 142(a); Welch v. Helvering, 290
U.S. 111 (1933). If we find that the transaction was cast as
debt, then it would be more difficult for petitioner to disavow
the form and successfully show that the advances were equity in
substance.
Respondent contends that, prior to the audit, petitioner
treated the advances for financial purposes and tax reporting as
loans or debt. Petitioner counters that, irrespective of the
labels originally attached to the advances, they were, in
substance, capital contributions. Petitioner argues that it is
entitled to disavow the form of its transaction.9
Taxpayers are free to structure their transactions in a
manner that will result in their owing the least amount of tax
possible. However, the Supreme Court observed in Commissioner v.
9 In support of its argument, petitioner, cites J.A. Tobin
Constr. Co. v. Commissioner, 85 T.C. 1005 (1985); Georgia-Pac.
Corp. v. Commissioner, 63 T.C. 790 (1975); J.A. Maurer, Inc. v.
Commissioner, 30 T.C. 1273 (1958); LDS, Inc. v. Commissioner,
T.C. Memo. 1986-293; Inductotherm Indus., Inc. v. Commissioner,
T.C. Memo. 1984-281, affd. without published opinion 770 F.2d
1071 (3d Cir. 1985).
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