"If payment to the transferor is dependent solely upon the success of an untried, undercapitalized business, the prospects of which are uncertain, the transfer of property raises a strong inference that it is, in fact, an equity contribution." Burr Oaks Corp. v. Commissioner, 43 T.C. 635, 647 (1965), affd. 365 F.2d 24 (7th Cir. 1966); Estate of Mixon v. United States, supra at 404; Aqualane Shores, Inc. v. Commissioner, 269 F.2d 116, 119-120 (5th Cir. 1959), affg. 30 T.C. 519 (1958). Although the land was purportedly purchased by Terra in consideration for the note, Vista received no downpayment and took no security for the note in the form of a mortgage or other lien.
"If payment to the transferor is dependent solely upon the success of an untried, undercapitalized business, the prospects of which are uncertain, the transfer of property raises a strong inference that it is, in fact, an equity contribution." Burr Oaks Corp. v. Commissioner Dec. 27,240, 43 T.C. 635, 647 (1965), affd. 365 F.2d 24 (7th Cir. 1966); Estate of Mixon v. United States, supra at 404; Aqualane Shores, Inc. v. Commissioner 59-2 USTC ¶ 9632, 269 F.2d 116, 119-120 (5th Cir. 1959), affg. Dec. 23,013 30 T.C. 519 (1958). Although the land was purportedly purchased by Terra in consideration for the note, Vista received no down payment and took no security for the note in the form of a mortgage or other lien.
In rare circumstances, for purposes of determining whether purportedly nonprofit cemetery corporations qualified for tax exemption under sec. 501, courts have treated as equity interests certain profit-sharing arrangements with insiders. See Knollwood Mem'l Gardens v. Commissioner, 46 T.C. 764, 781 (1966) ("This arrangement embodies the very essence of an equity interest, 'a participation in the pot luck of the enterprise.'" (quoting Aqualane Shores, Inc. v. Commissioner, 269 F.2d 116, 119 (5th Cir. 1959), aff'g 30 T.C. 519 (1958)); Rose Hills Mem'l Park Ass'n v. United States, 463 F.2d 425, 430 (Ct. Cl. 1972). These cases, however, did not involve any issue of beneficial ownership for purposes of subchapter S.
47 B.T.A. 425 (1942); Turner v. Commissioner, 303 F.2d 94 (4th Cir. 1962), affg. on this issue a Memorandum Opinion of this Court, cert. denied 371 U.S. 922 (1962); B. Bittker & J. Eustice, Federal Income Taxation of Corporations and Shareholders, par. 3.04 (3d ed. 1971). However, a short-term note, and demand notes, will be considered securities in circumstances where the stated maturity is either unrealistic (see Aqualane Shores, Inc. v. Commissioner, 269 F.2d 116 (5th Cir. 1959), affg. 30 T.C. 519 (1958)); or is ignored by the parties (see United States v. Mills, 399 F.2d 944 (5th Cir. 1968)). In the instant case, there is no evidence to support the possibility of payment of the note on demand at any future time foreseeable at the date of its issuance.
See Mark Bixby, supra at 776-777. Each case of this type must be decided on its own peculiar facts, and for this reason we think Aqualane Shores, Inc., 30 T.C. 519, 527-528 (1958), cited to us by petitioner, is distinguishable. There the testimony of real estate experts indicated the value of the property in question was ‘far from static’ and the sales price ‘approximately equivalent’ to its fair market value.
There is evidence, too, that at the time of petitioner's loans, Lots, Inc., could have obtained the necessary funds from commercial banks on its own security. See Aqualane Shores, Inc., 30 T.C. 519, affd. 269 F.2d 116. Respondent cites Burr Oaks Corp., supra, as controlling here.
We think the opposite inference arises where, as in the instant case, the parties intended to and in fact did make principal and interest payments out of current earnings generated by the continued success of a well-established business which enjoyed not only a good past earnings' record but equally good prospects for the future. Aqualane Shores, Inc. v. Commissioner, 269 F.2d 116, 120 (C.A. 5, 1959), affirming 30 T.C. 519 (1958). The property acquired by New Baker from the partnership was producing substantial income and the parties, based upon marketing projections, fairly believed that payments on the note could be made without impairing the capital assets of New Baker.
This arrangement embodies the very essence of an equity interest, ‘a participation in the pot luck of the enterprise.’ Aqualane Shores, Inc. v. Commissioner, 269 F.2d 116, 119 (C.A. 5, 1959), affirming 30 T.C. 519 (1958). ‘When the payment to the transferors is dependent on the success of an untried undercapitalized business with uncertain prospects, a strong inference arises that the transfers is an equity contribution.’
Moreover, the land transferred to petitioner by Elkind, Watkins, and Ritz was its only asset of significance and, without it, petitioner could not have engaged in business. See and compare Edward G. Janeway, 2 T.C. 197 (1943), affd. 147 F.2d 602 (C.A. 2, 1945); Aqualane Shores, Inc., 30 T.C. 519 (1958), affd. 269 F.2d 116 (C.A. 5, 1959). It was at all times contemplated by Elkind, Watkins, and Ritz that the land would remain at the risk of petitioner's business.
Moreover, the land transferred to petitioner by Elkind, Watkins, and Ritz was its only asset of significance and, without it, petitioner could not have engaged in business. See and compare Edward G. Janeway, 2 T.C. 197, (1943), affd. 147 F.2d 602 (C.A. 2, 1945); Aqualane Shores, Inc., 30 T.C. 519 (1958), affd. 269 F.2d 116 (C.A. 5, 1959). It was at all times contemplated by Elkind, Watkins, and Ritz that the land would remain at the risk of petitioner's business.