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Moreover, transfers to closely held corporations by controlling
shareholders are subject to heightened scrutiny. Labels attached
to such transfers by the controlling shareholders through
bookkeeping entries or testimony have limited significance unless
these labels are supported by objective evidence. See Fin Hay
Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir. 1968);
Goodrich v. Commissioner, T.C. Memo. 1997-194. “Courts will not
tolerate the use of mere formalisms solely to alter tax
liabilities.” Hardman v. United States, 827 F.2d 1409, 1411 (9th
Cir. 1987) (quoting Commissioner v. Court Holding Co., 324 U.S. 331,
334 (1945)).
After careful consideration of the facts and circumstances
surrounding petitioners’ advances to HPD and utilizing some of the
factors noted above in addition to others, we conclude that the
advances are capital contributions, not loans.
First, petitioners advanced money to HPD, their wholly owned
C corporation, without intent that such advances be treated as debt
rather than equity. Not engaged in the business of lending money,
petitioners made the advances simply because the corporation needed
the cash to survive. According to petitioner, the advances were
made in order to “salvage” petitioners’ investment because capital
6(...continued)
of repayment, and did that intention comport
with the economic reality of creating a
debtor-creditor relationship?” [Citations
omitted.]
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