Indmar Products Co., Inc. - Page 8

                                        - 8 -                                         
          Roth Steel Tube Co. v. Commissioner, 800 F.2d 625, 630 (6th Cir.            
          1986), affg. T.C. Memo. 1985-58.  In determining the economic               
          reality of a related party transfer, “‘the ultimate issue is                
          * * * whether the transaction would have taken the same form had            
          it been between the corporation and an outside lender’”.  Fed.              
          Express Corp. v. United States, 645 F. Supp. 1281, 1290 (W.D.               
          Tenn. 1986) (quoting Scriptomatic, Inc. v. United States, 555               
          F.2d 364 (3d Cir. 1977)).  The more a transfer appears to result            
          from an arm’s-length transaction, the more likely the transfer              
          will be considered debt.  Bayer Corp. v. Mascotech, Inc., 269               
          F.3d 726, 750 (6th Cir. 2001).                                              
               In distinguishing between debt and equity, courts also                 
          analyze whether the contemporaneous facts establish an                      
          unconditional obligation to repay.  Roth Steel Tube Co. v.                  
          Commissioner, supra at 630; Smith v. Commissioner, supra at 180;            
          see Burrill v. Commissioner, supra at 669.  In Roth Steel, the              
          Court of Appeals for the Sixth Circuit used an 11-factor test to            
          determine whether the transfer was debt or equity.4  No factor is           

               4 The 11 factors are:  (1) Identity of interest between                
          creditor and stockholder, (2) adequacy or inadequacy of                     
          capitalization, (3) source of payments, (4) name given                      
          instruments evidencing indebtedness, (5) presence or absence of             
          fixed maturity date and schedule of payments, (6) presence or               
          absence of a fixed rate of interest and interest payments, (7)              
          presence or absence of security, (8) inability to obtain outside            
          financing, (9) subordination of transfers, (10) presence or                 
          absence of a sinking fund, and (11) extent to which the transfers           
          were used to acquire capital assets.  Roth Steel Tube Co. v.                

Page:  Previous  1  2  3  4  5  6  7  8  9  10  11  12  13  14  Next

Last modified: May 25, 2011