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$100,000 was a loan to PTSI. He argues that the preferred return
is similar to a loan repayment schedule because it entitles him
to receive a return of principal along with a specified rate of
interest. Petitioner contends the 4-percent participation
percentage he received was collateral for the purported loan.
Where a taxpayer seeks to vary the form in which a
transaction is cast pursuant to an arm’s-length bargain, we
require strong proof that the form of the transaction does not
reflect its substance. Miami Purchasing Serv. Corp. v.
Commissioner, 76 T.C. 818, 830 (1981); Major v. Commissioner, 76
T.C. 239, 246 (1981); see also Schulz v. Commissioner, 294 F.2d
52 (9th Cir. 1961), affg. 34 T.C. 235 (1960).
Petitioner challenges the form of the transaction based
solely on the allegedly debtlike characteristics of the preferred
return. In the context of partnership agreements, however,
arrangements such as the preferred return are not unusual:
Many partnership agreements provide partners who
contribute capital with some sort of distribution
preference. Frequently, the preference is expressed as
an annual percentage return on invested capital. In
this respect, if in no other, a distribution preference
may resemble a form of “interest” on capital. This
superficial resemblance is likely to be misleading,
however. Distribution preferences rarely have either
the economic or the tax attributes of true interest
payments to partners. [Whitmire et al., Structuring &
Drafting Partnership Agreements: Including LLC
Agreements, par. 5.03 (3d ed. 2006).]
See also Jacobson v. Commissioner, 96 T.C. 577, 591 (1991)
(describing as “usual and customary” arrangements whereby “the
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