The intention of the parties is controlling, and such intention is a fact to be gleaned from the entire record. Cf. Tribune Publishing Co., 17 T.C. 1228; Ruspyn Corporation, 18 T.C. 769; Isidor Dobkin, 15 T.C. 31, affirmed per curiam 192 F.2d 392 (C.A. 2); Lansing Community Hotel Corporation, 14 T.C. 183, affirmed per curiam 187 F.2d 487 (C.A. 6); Sam Schnitzer, 13 T.C. 43, affirmed per curiam 183 F.2d 70 (C.A. 9), certiorari denied 340 U.S. 911; Cleveland Adolph Mayer Realty Corporation, 6 T.C. 730, reversed on another issue 160 F.2d 1012 (C.A. 6); Joseph B. Thomas, 2 T.C. 193. In United States v. Title Guarantee & Trust Co., 133 F.2d 990 (C.A. 6), where it was held that under the facts of that case the intention of the parties was to create a true debtor-creditor relationship, the court said at page 993:
The investments were considered temporary and after liquidation of one corporation reinvestment was made in a similar corporation. Held, under the facts, that petitioner's advances to E corporation were capital contributions and his loss upon E's liquidation is not deductible in full as a bad debt, but is deductible as a capital loss subject to the limitations of section 117 of the Internal Revenue Code. Isidor Dobkin, 15 T.C. 31,affd.per curiam(C.A. 2), 192 F.2d 392, followed.
It must be remembered that Electronic was petitioner's wholly owned subsidiary, and whether its advances to Electronic created a debtor-creditor relationship or constituted merely contributions to capital calls for special scrutiny. The mere fact that advances are labeled as loans is by no means determinative. Cf. Isidor Dobkins, 15 T.C. 31; Sam Schnitzer, 13 T.C. 43, affd. (C.A. 9) 183 F.2d 70, certiorari denied 340 U.S. 911; Erard A. Matthiessen, 16 T.C. 781. We do not have in this case any evidence of any official corporate action, either on the part of petitioner or Electronic, which undertook to establish the character of the advances as loans.
Held, the loss on liquidation of the Hildegarde Realty Co., Inc., represents a capital loss as the funds advanced under the guise of loans were capital contributions. Isidor Dobkin, 15 T.C. 31, followed. Respondent has determined a deficiency of $4,623.15 in petitioners' income tax for the calendar year 1945.
Considering only the stockholders' advances, the debt-capital ratio is in excess of 85 to 1. Considering all other loans, the debt-capital ratio stands at $205,640 to $500, or in excess of 411 to 1 at the time the initial financial outlay was completed. As stated in Dobkin v. Commissioner of Internal Rev., 15 T.C. 31 at 33 (affirmed per curiam (C.A. 2, 1951) 192 F.2d 392): 'When the organizers of a new enterprise arbitrarily designate as loans the major portion of the funds they lay out in order to get the business established and under way, a strong inference arises that the entire amount paid is a contribution to the corporation's capital and is placed at the risk of the business.'
This intention must be the objective intent disclosed by all the pertinent factors in the case and not just the formal manifestations of intent declared by the taxpayer. Maloney v. Spencer, supra; Dobkin v. C.I.R., 15 T.C. 31 (1950), affirmed 192 F.2d 392 (2d Cir. 1951); See also O.H. Kruse Grain Milling v. C.I.R., 279 F.2d 123 (9th Cir. 1960) for a list of determining factors. The factors which indicate to the court that the advances by Drown were loans are (1) Drown's stated intent respecting the advancements that "Such loans shall in no event be considered as capital advanced, but shall in each case be strictly regarded as loans"; (2) consistent treatment of these advances as loans on the books of the corporation and of the taxpayer; (3) the issuance of notes as evidence of the debt; (4) the chattel mortgage securing the debts; (5) the original capitalization of Design ($15,000 in stock and $22,000 in loans from Drown) and the originally intended maximum capitalization ($15,000 in stock and $35,000 in loans from Drown) which were adequate; (6) most of the advances were made subsequent to, rather than upon incorporation, after Drown returned from Europe in mid-August, 1946; (7) both Loper and Drown underesti
Rowan v. United States, 5 Cir., 219 F.2d 51; Sun Properties v. United States, 5 Cir., 220 F.2d 171. John Kelley Co. v. Commissioner, 326 U.S. 521, 66 S.Ct. 299, 90 L.Ed. 278; Root v. Commissioner, 9 Cir., 220 F.2d 240; Gilbert v. Commissioner, supra; Mullin Building Corp. v. Commissioner, 9 T.C. 350, affirmed 3 Cir., 167 F.2d 1001; Izador Dobkin v. Commissioner, 15 T.C. 31, affirmed 2 Cir., 192 F.2d 392; Bair v. Commissioner, 16 T.C. 90, affirmed, 2 Cir., 199 F.2d 589; Gunn v. Commissioner, 25 T.C. 424; Colony, Inc., v. Commissioner, 26 T.C. 30, affirmed on another ground, 6 Cir., 244 F.2d 75, reversed on another ground, 357 U.S. 28, 78 S.Ct. 1033, 2 L.Ed.2d 119. (2) Use to Which the Advances Were Put.
To be successful in this portion of its action, plaintiff has the burden of establishing that the advances made by Subway to Pretest were bona-fide loans rather than contributions to capital, and thus deductible as business bad debts under 1939 Internal Revenue Code § 23(k)(1), 26 U.S.C.A. § 23(k)(1). Janeway v. Commissioner, 2 Cir., 1945, 147 F.2d 602; Dobkin v. Commissioner, 15 T.C. 31, affirmed, 2 Cir., 1951, 192 F.2d 392; Matthiessen v. Commissioner, 2 Cir., 1952, 194 F.2d 659; Bair v. Commissioner, 2 Cir., 1952, 199 F.2d 589; Bachrach v. Commissioner, 18 T.C. 479, affirmed, 2 Cir., 1953, 205 F.2d 151; Reed v. Commissioner, 2 Cir., 1957, 242 F.2d 334. It is, of course, the intention at the time the transaction occurred which is essential (Matthiessen v. Commissioner, supra) and that intention is to be derived from all of the relevant facts.
In studying the facts of the case, substance should be looked to rather than form. Schnitzer v. C. I. R., 1949, 13 T.C. 43, affirmed 9 Cir., 183 F.2d 70, certiorari denied 340 U.S. 911, 71 S.Ct. 291, 95 L.Ed. 658; Dobkin v. C. I. R., 1950, 15 T.C. 31, affirmed 2 Cir., 192 F.2d 392. Therefore, although plaintiff's advances were shown on the books of the corporations as loans, and were evidenced by promissory notes, these formalities are not controlling.
The A and B preferred possessed dividend and liquidation preferences normally associated with senior securities and, additionally, the voting characteristic of most common stock. The history of the corporation indicates that the stock was an equity interest, see Isidor Dobkin, 15 T.C. 31 (1950), affd. 192 F.2d 392 (2d Cir. 1951), and that Blanche held the A and B shares at her pleasure. The record discloses nothing indicating Blanche held the voting stock temporarily or that she was obligated to divest herself of the voting stock in the future.