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. • IRS’s 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 doesn’t match its economic reality, are the corporation’s payment of interest was deductible ?

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

6. Reasoning: • Shareholder’s 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 shareholder’s advance is far more speculative than what an outsider would make; • The corporation needs funds to function; • Loan repayment depends on corporation profits;