Delta Plastics, Inc. - Page 11




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          debts of petitioner, payments on the debenture notes depended               
          solely on future earnings of petitioner which put the debenture             
          funds at an equal amount of risk as petitioner’s equity.                    
          Reliance, however, upon future earnings for payment of a                    
          purported debt generally does not cause the funds received by a             
          corporation to be treated as equity.  See J.S. Biritz Constr. Co.           
          v. Commissioner, 387 F.2d 451, 458-459 (8th Cir. 1967), revg.               
          T.C. Memo. 1966-227.                                                        

          Third-Party Loans                                                           
               Funds are more likely to be treated as debt if at the time             
          the funds were received the corporation had credit available from           
          outside sources.  Am. Offshore, Inc. v. Commissioner, supra at              
          605 (citing Estate of Mixon v. United States, supra at 410).                
               The evidence indicates that petitioner was successful in               
          obtaining secured loans from outside creditors, and at no time              
          was petitioner refused a loan from a third party.                           

          Management Participation                                                    
               Funds received by a corporation will be more likely treated            
          as equity if, as a result of such receipt, the person                       
          transferring the funds had a right to participate in the                    
          management of the corporation.  Am. Offshore, Inc. v.                       
          Commissioner, supra at 603.                                                 








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Last modified: May 25, 2011