Planning Techniques to Avoid the Reclassification of Shareholder Debt as Equity — footnotes

¹ TDs 7747 (12/31/80) and 7801 (1/5/82).

² Field Service Advisory 200205031 (2/1/02).

³ Gloucester Ice & Cold Storage Co., 298 F2d 183 (1st Cir. 1962).

⁴ Ambassador Apartments, Inc., 50 TC 236 (1968); and Kathryn Fuscaldo, 267 FSupp2d 442 (ED PA 2001).

⁵ Indmar Products Co., Inc., 444 F3d 771 (6th Cir. 2006); for a discussion, see Burke, Tax Clinic, “Debt vs. Equity: The Saga Continues,” 37 The Tax Adviser 507 (September 2006).

⁶ Benjamin D. Gilbert, 248 F2d 399 (2d Cir. 1957).

⁷ Joseph L. Fischer, 441 FSupp 32 (ED PA 1977) (“absence of an unconditional right to demand payment is practically conclusive that an advance is equity”).

⁸ Roth Steel Tube Co., 800 F2d 625 (6th Cir. 1986).

⁹ Kent Jensen, 208 F3d 226 (10th Cir. 2000).

¹⁰ Est. of Travis Mixon, 464 F2d 394 (5th Cir. 1972).

¹¹ Thomas M. Fries, TC Memo 1997-93.

¹² See Indmar Products Co., Inc., note 5 supra; Baker Commodities, Inc., 48 TC 374 (1967); and Scriptomatic, Inc., 555 F2d 364 (3d Cir. 1977).

¹³ Universal Racquetball Rockville Centre Corp., TC Memo 1986-363; see also Thomas R. Sutherland, TC Memo 1991-619, and Joseph Nachman, TC Memo 1996-288, in which similar sets of facts yielded the same result.

¹⁴ Alexander Jones, 659 F2d 618 (5th Cir. 1981); see Est. of Mixon, note 10 supra, for a discussion of the same issue.

¹⁵ A.R. Lantz, 424 F2d 1330 (9th Cir. 1970).

¹⁶ Midland Distributors, Inc., 481 F2d 730 (5th Cir. 1973).

¹⁷ See Jensen, note 9 supra; Lantz, note 15 supra; and Roth Steel Tube Co., note 8 supra.

¹⁸ See Fuscaldo, note 4 supra.

¹⁹ Fries, note 11 supra.

²⁰ See Jean I. Tedford, TC Summ. Op. 2004-132; Flint Industries, Inc., TC Memo 2001-276; Ginsberg, 6th Cir., 8/18/93; Inductotherm Indus., Inc., TC Memo 1984-281; Victor I. Rosenburg, TC Memo 2000-108; and Simon W. Henderson, 375 F2d 36 (5th Cir. 1967).

²¹ Rev. Rul. 86-119, 1986-2 CB 81.

²² It is generally not problematic if debt is repaid from E&P. The problem arises when repayment is contingent on said E&P.

²³ See R-W Specialties, Inc., TC Memo 1981-697.

²⁴ Est. of Mixon, note 10 supra.

²⁵ Rudolph Hardman, 827 F2d 1409 (9th Cir. 1987).

²⁶ John Kelley Co., 326 US 521 (1946).

²⁷ Bowater, Inc., TC Memo 1995-164.

²⁸ Nachman, note 13 supra.

²⁹ See Brazoria Cty. Stewart Food Markets, Inc., TC Memo 2001-220 (a ratio of 1,000:1 and debt was reclassified); Roth Steel Tube Co., note 8 supra (a ratio of 300:1 was excessive).

³⁰ Baker Commodities, Inc., note 12 supra.

³¹ See P.M. Finance Corp., 302 F2d 786 (3d Cir. 1962).

³² See Jolana Bradshaw, 683 F2d 365 (Ct. Cl. 1982).

³³ Delta Plastics Inc., TC Memo 2003-54.

³⁴ Jean C. Tyler, 414 F2d 844 (5th Cir. 1969).

³⁵ Henderson, note 20 supra.

³⁶ Despite the absence of an authoritative rule creating an acceptable benchmark for the ratio, it appears that it would be to the taxpayer’s benefit to provide a reasonable argument as to what an acceptable range would be. In Universal Racquetball Rockville Centre Corp., note 13 supra, the court took a negative view of the absence of information from the taxpayer as to the proper range.

³⁷ Phillip E. Bauer, 748 F2d 1365 (9th Cir. 1984).

³⁸ S Rep’t No. 91-552, 91st Cong., 1st Sess. (1969), at 1963-3 CB 513.

³⁹ See Bowater, note 27 supra.

⁴⁰ See Ginsberg, note 20 supra (“authorities uniformly use the ‘outside ratio’”).

⁴¹ Jensen, note 9 supra. In this case, the court could not calculate the outside ratio because the taxpayer had failed to furnish financial statements or balance sheets as evidence.

⁴² Laidlaw Transportation, Inc., TC Memo 1998-232.

⁴³ John W. Dillin, 433 F2d 1097 (5th Cir. 1970), aff’g DC FL, 4/2/69.

⁴⁴ Brazoria Cty. Stewart Food Markets, Inc., note 29 supra; see also Tedford, note 20 supra.

⁴⁵ Gilbert, note 6 supra.

⁴⁶ See Nachman, note 13 supra.

⁴⁷ See J.S. Biritz Construction Co., 387 F2d 451 (8th Cir. 1967).

⁴⁸ Rodney Noble, TC Summ. Op. 2002-68.

⁴⁹ Notice 94-47, 1994-1 CB 357.

⁵⁰ See Nachman, note 13 supra.

⁵¹ In Biritz, note 47 supra, the shareholder sold a parcel of land held as inventory by the corporation in exchange for a note deemed to be valid debt by the court.

⁵² Gloucester Ice & Cold Storage Co., note 3 supra.

⁵³ This was the case in Flint Industries, Inc., note 20 supra, and American Offshore, Inc., 97 TC 579 (1991).

⁵⁴ Examples include Ginsberg, note 20 supra; Slappey Drive Industrial Park, 561 F2d 572 (5th Cir. 1977); Alterman Foods, Inc., 505 F2d 873 (5th Cir. 1974); American Offshore, Inc., note 53 supra; Dixie Dairies Corp., 74 TC 495 (1980), and the cases cited therein.

⁵⁵ Nestle Holdings Inc., TC Memo 1995-441.