Presented by Yi Liang

1
Fin Hay Realty Co. v. U.S. 398 F.2d 694 (3rd Cir.
1968)

• Presented by Yi Liang

2
Justice Freeman, Van Dusen
Citation Fin Hay Co. v. U.S., 22 AFTR 2d 5004,
398 F.2d 694 (3rd Cir. 1968),68-2 USTC P9438
History CA-3 and D. Ct. for government

• Freedman affirmed district court ruling
• Van Dusen enter judgment against U.S.

3
Facts

• The taxpayer start real estate investments by two
  shareholders. Each shareholders have an equal
  share of stock and debt obligations.
• Taxpayer claimed that funds entrusted to a
  corporation in form of loans, thus, interest
  payments of the loans are deductible on the
  corporation tax return.
• IRSs position is that advances to a close
  corporation is capital contribution instead of
  debt because the real nature of loan transaction
  did not match its economic reality.

4
Issue

• When cash contributes to a close corporation by
  its shareholders in a form of loans and real
  nature of loan transaction doesnt match its
  economic reality, are the corporations payment
  of interest was deductible ?

5
Holding

• No, when cash contributes to a close corporation
  by its shareholders in a form of loans, they
  doesnt represent a debt, but capital
  contribution if real nature of loans does not
  match its economic reality. Thus, the
  corporations payment of interest was not
  deductible.

6
Reasoning

• Shareholders debt was in the same proportion as
  their stock ownership
• There was no strict debtor-creditor relationship
  
• no retirement provision for the principal
• no set maturity date for the loans
• Real nature of loan transaction does not match
  its economic reality.
• The shareholders advance is far more
  speculative
• than what an outsider would make
• The corporation needs funds to function
• Loan repayment depends on corporation profits