Opinion ID: 3010690
Heading Depth: 2
Heading Rank: 1

Heading: Margin Interest Transactions

Text: The Tax Court's conclusion that a portion of Geftman's distribution from Trust C was taxable rested in significant part on its finding that the $82,764 which the estate paid to the trusts in connection with the margin advances constituted taxable interest income which the trusts received in their capacity as creditor rather than beneficiary of the estate. Geftman, 72 T.C.M. (CCH) at 821. This finding, in turn, rested on the court's determination that the $2.85 million which the trusts transferred to the estate gave rise to a bona fide debt owed by the estate to the trusts. See id. For disbursements to constitute true loans there must have been, at the time the funds were transferred, an unconditional obligation on the part of the transferee to repay the money, and an unconditional intention on the part of the transferor to secure repayment. Haag v. Commissioner, 88 T.C. 604, 615-16 (1987), aff 'd, 855 F.2d 855 (8th Cir. 1988) (table); accord Saigh v. Commissioner, 36 T.C. 395, 419 (1961). In the absence of direct evidence of intent, the nature of the transaction may be inferred from its objective characteristics, see Haag, 88 T.C. at 616, including the presence or absence of debt instruments, collateral, interest provisions, repayment schedules or deadlines, book entries recording loan balances or interest payments, actual repayments, and any other attributes indicative of an enforceable obligation to repay the sums advanced. See Fin Hay Realty Co. v. United States, 398 F.2d 694, 696 (3d Cir. 1968). Where, as here, the transactions occur between related entities rather than at arms' length, they are subject to particular scrutiny because the control element suggests the opportunity to contrive a fictional debt. In re Uneco, Inc., 532 F.2d 1204, 1207 (8th Cir. 1976) (citations and internal quotations omitted). Thus, a transaction must be measured against an objective test of economic reality and characterized as a bona fide loan only if itsintrinsic economic nature is that of a genuine indebtedness. Fin 12 Hay, 398 F.2d at 697. In light of these principles, we must consider whether the evidence as to the contemporaneous intent at the time of the transfers and the objective attributes and economic realities of the transaction between the trusts and the estate support the Tax Court's conclusion that the transactions gave rise to a bonafide debt.
The Tax Court acknowledged that a transfer will be characterized as a bona fide loan if  `at the time the funds were transferred, [there was] an unconditional intention on the part of the transferee to repay the money, and an unconditional intention on the part of the transferor to secure repayment.'  Geftman, 72 T.C.M. (CCH) at 820 (quoting Haag, 88 T.C. at 616). The court found that the January 17, 1984 memorandum memorializing the lawsuit Settlement Agreement which referred to borrowing from the stockbroker by using the trusts assets as collateral constituted evidence of the requisite intent. Id . at 821. We disagree.11 The determinative fact is the intention as it existed at the time of the transaction. Saigh, 36 T.C. at 420. While the Tax Court stated that the January 17 memorandum was followed by a transfer of funds from the trusts to the estate, Geftman, 72 T.C.M. (CCH) at 821, it did not acknowledge that by the time of the January 17 meeting, the trusts already had borrowed almost $1.25 million in brokerage loans and had transferred funds to the estate with no statements from either entity as to the intended nature of those transfers. The Commissioner asserts, br. at 25, that the January 17 meeting merely ratified an intention existing at the time of the initial transfers. However, the memorandum of that meeting indicates that the issue of whether to borrow was the subject oflengthy discussion and dissent among the estate's representatives. Although the memorandum states that the _________________________________________________________________ 11. The parties stipulated that this memorandum constitutes the only written evidence of indebtedness reflecting any debt due from the Estate to the Trusts. App. at 134. 13 representatives were able to agree by the end of that meeting, the ongoing dissent as of January 17 reveals that the representatives had not formed the requisite unconditional intention to enter into a debt transaction as of December 1983 when the transfers began. Courts have refused to credit statements of intent made after the time of the transfer even where the statements consist of formal resolutions establishing the precise terms of a debt. See Georgiou v. Commissioner, 70 T.C.M. (CCH) 1341, 1350-51 (1995). In Saigh, 36 T.C. 395, the court rejected the assertion that there was a debt because funds had been transferred between a subsidiary and a parent corporation and, as in this case, at that time nothing was said concerning the nature of the transfer. Id. at 419. Although the transferor's directors then authorized a loan consisting in part of the sums already transferred and the transferee then executed a secured note payable to the transferor on demand at a specified interest rate, the court found this evidence of intent insufficient as it was not contemporaneous with the initial transfer. As the court explained, the parties had been undecided as to the nature of the transaction at its inception, and this indecision affirmatively dismisses the possibility that on the date of transfer there was an unconditional intention on the part of the transferee . . . and . . . the transferor to secure repayment. Id. Similarly, in this case neither the trusts nor the estate expressed the requisite intent to enter into a loan transaction at the time of the initial transfer, and the evidence that the estate's representatives remained undecided during the following month precludes us from finding that they had formed an unconditional intention as the transfers commenced in December 1983.12 _________________________________________________________________ 12. The Commissioner asserts that one of the representatives testified that a loan . . . was intended from the outset. Br. at 29 (citing app. at 15, supp. app. at 3-5, 10). The record does not support this assertion. The cited testimony simply describes the transactions in retrospect as loans and borrowing without clarifying whether the intent to borrow existed at the time the transfers were made. Wefind nothing in the record suggesting that the intent to create an enforceable debt existed as of December 1983. 14 The Commissioner contends, br. at 28-29, that this case is distinguishable from Saigh because any indecision at the January 17 meeting arose from uncertainty over whether to proceed with a loan as opposed to the sale of estate assets, and therefore involved a debate between two distinct transactions, whereas in Saigh the parties were considering two different characterizations of the same transaction. Thus, the Commissioner argues, in contrast to Saigh where the parties could have remained undecided while making the transfer, in this case the very fact of the transfer reveals that the estate had opted to borrow instead of selling estate assets. We find this distinction unpersuasive. The mere fact that a transfer occurred does not establish whether that transfer was intended as a bona fide loan with the requisite unconditional intention to repay. See Haag, 84 T.C. at 616. While the transaction clearly did not entail a sale of estate assets, the fact that it involved a transfer is not sufficient to establish that the transfer may be characterized as a bona fide loan for tax purposes. In the absence of any evidence that the transfer was intended at its inception to create an unconditional obligation to repay the sums transferred, we cannot infer that, simply because there was a transfer, a bona fide indebtedness was created. Even if the intentions expressed in the January 17 memorandum could be viewed as reasonably contemporaneous with the initial transfer, those intentions are not sufficient to support a finding of an intent to create a bona fide debtor-creditor relationship between the estate and the trusts. The memorandum's only allusion to borrowing refers to borrowing from the stockbroker by using trust assets as collateral. App. at 135a. This statement reflects only the undisputed fact that significant sums were borrowed from the stockbroker, E.F. Hutton, and then advanced from the trusts to the estate. It does not illuminate whether the trusts, in transferring the borrowed sums to the estate, intended those transfers to be bona fide loans subject to an unconditional obligation to repay or whether the estate intended to be bound by an unconditional obligation to repay the advances. The January 17 memorandum, therefore, cannot be construed 15 as evidence of a contemporaneous, unconditional intent to create a bona fide debt owed by the estate to the trusts. Because this document constitutes the only evidence in the record purporting to express the intent behind the transactions, and because this document indicates that the requisite intent had not been formed at the relevant time, the record cannot support the Tax Court's finding that the estate and the trusts intended at the time of the initial transfer to create an unconditional debt.
The necessary intent to create a bona fide indebtedness can be inferred not only from expressions of the parties' intentions, but also from objective aspects of the transaction such as the presence vel non of notes or other debt instruments, security or collateral, interest charges, repayment schedules or deadlines, book entries recording loan balances or payments, actual repayments, or any other factors indicative of an unconditional obligation to repay. See Fin Hay, 398 F.2d at 696; Haag, 88 T.C. at 616. The Tax Court acknowledged that in transferring $2.85 million to the estate, the trusts did not obtain a debt instrument or other written promise to repay, did not require any collateral or security, did not impose any interest charges, did not establish a repayment schedule or maturity date, and did not make any entries on their books treating the transfers as loans. See Geftman, 72 T.C.M. (CCH) at 820-21. In concluding that the transfers nonetheless constituted bona fide loans, the court relied primarily on the fact that the estate had made $82,764 in repayments to the trusts. See id. at 821. 13 However, upon analyzing the significance of these repayments and of the _________________________________________________________________ 13. The court also characterized as objective evidence of indebtedness the January 17, 1984 memorandum and a June 11, 1985adjusting journal entry referring to a partial debt settlement with the trusts. Geftman, 72 T.C.M. (CCH) at 821. However, suchallegedly objective . . . indicia which merely represent a party's characterization of the transaction are unpersuasive unless supported by objective factors demonstrating economic reality. Gilbert v. Commissioner, 74 T.C. 60, 65 (1980). Accordingly, we confine our analysis to the objective characteristics of the transfer which bear on its actual terms. 16 other objective attributes of the transaction, wefind that its objective characteristics preclude us from upholding the Tax Court's conclusion that it gave rise to a bonafide debt.
The Tax Court found that the estate's repayments to the trusts of $82,764 were indicative of a bona fide debt. While the court described the repayments as interest paid to the trusts . . . on loans from the trusts to the estate, it recognized that the payments constituted a portion of the margin interest charged on the trusts' loan from E.F. Hutton, as each of the four repayments corresponded to handwritten notations on the prior month's E.F. Hutton statement calculating the portion of the E.F. Hutton interest charges attributable to the sums advanced to the estate. Geftman, 72 T.C.M. (CCH) at 821. The fact that the estate merely reimbursed the trusts for a portion of interest charges that the trusts incurred from a third party belies the court's conclusion that the trusts received these payments in the capacity of a bona fide creditor. See id.14 Even if the trusts had not owed the $82,764 to the thirdparty lender that provided the capital in this transaction, but rather had received that sum from the estate and retained it as repayment of principal or as payment of interest charged by the trusts themselves, repayment in _________________________________________________________________ 14. The Commissioner asserts, br. at 34, that the estate was to pay the trusts enough to allow the trusts to make a profit after paying the interest charged by E.F. Hutton. The Commissioner concedes that no documents reflect such an arrangement, and relies solely on testimony in which one of the representatives initially made the same assertion, but then, when questioned about the lack of records to that effect, acknowledged, I have to be honest with you. . . . My recollection is it was done at a profit [for the trusts], but if the records do not so reflect, then the trusts were to receive no less than dollar for dollar on the amounts they were charged by E.F. Hutton. App. at 19. This testimony does not support a finding that the trusts were to earn a profit on the transactions. While the Tax Court found that the trusts could not have made their monthly payments to E.F. Hutton unless they had received the payments from the estate, see Geftman, 72 T.C.M. (CCH) at 821, this fact does not elucidate whether the payments properly may be characterized as interest paid on a bona fide debt. 17 that amount would be insufficient to support afinding of a bona fide obligation to repay the $2.85 million transferred to the estate, since repayments which are insubstantial in relation to the amount transferred are not indicative of a bona fide debt. In In re Uneco, 532 F.2d 1204, the transferee repaid $40,000 on a transfer of $193,090; $26,869 on a transfer of $227,571; and $120,728 on a transfer of $207,667, representing repayments of approximately 21%, 12%, and 58%, respectively, for an aggregate repayment of approximately 30% of the total amount advanced. The court found these payments insufficient to establish that the transferee had an unconditional obligation to repay the principal amount transferred. See id. at 1204. Thus, a fortiori, the repayments in this case of $82,764 on a transfer of $2.85 million, representing a repayment of only 3% of the total amount transferred, cannot be regarded as evidence of a bona fide obligation to repay the principal amount transferred. In Gilbert v. Commissioner, 74 T.C. 60, 65-66 (1980), the court held that even complete repayment of the amount transferred was not indicative of a bona fide debt since the repayment occurred after a long period without repayments, and thus did not correspond to repayment terms or schedules established at the outset of the transaction. The pattern of repayments in this case similarly does not reveal any established repayment terms or schedules, as the estate made the repayments only on four occasions from May through August 1984, making no other repayments during the period in which it received transfers from the trusts. In Georgiou, 70 T.C.M. (CCH) at 1351, the court found that repayments were not probative of a bona fide debt as they not only were insubstantial in relation to the advances but also resulted in [f]ailure to repay an ever mounting loan balance. In this case the insubstantial repayments representing only 3% of the amount transferred similarly failed to reduce an ever-mounting loan balance resulting from the fact that the estate received additional transfers of $746,902 during the months in which it made the repayments of $82,764. See app. at 184, 178.15 For _________________________________________________________________ 15. The parties stipulated that [t]he total borrowing on margin as of August 31, 1984 was $2,850,408.34 and that [a]ll funds that were 18 these reasons, the repayments of $82,764 cannot be regarded as evidence of a bona fide debt, in contrast to repayments that are regularly made and result in an annual net reduction in the balance by discharging all stated interest charges and a portion of the principal. See, e.g., Litton Bus. Sys., Inc. v. Commissioner , 61 T.C. 367, 380 (1973).16 Thus, we find that the Tax Court erred in characterizing the $82,764 repayments as evidence of a bona fide debt.
The other objective characteristics of the transaction are equally inconsistent with the existence of a bonafide debt. While the Tax Court noted that the transfers were not accompanied by any notes, interest charges, collateral, repayment schedules, or book entries recording a loan balance, the court found the absence of these factors _________________________________________________________________ borrowed on margin from E.F. Hutton . . . were transferred to the Estate from the Trusts. App. at 131. The E.F. Hutton Statements reflect a margin loan balance that increased from $2,103,506 as of May 1984 to $2,850,408 as of August 1984, see app. at 184, 178, for a total increase of $746,902 during that period. Several courts have refused to characterize a transfer as a bona fide loan where, as here, the transferor did not establish a maximum loan amount but continued transferring funds at the transferee's request. See Haag, 88 T.C. 617; Electric & Neon, Inc. v. Commissioner, 56 T.C. 1324, 1328-29 (1971), aff 'd, 496 F.2d 876 (5th Cir. 1974) (table); Roschuni v. Commissioner, 29 T.C. 1193, 1202-04 (1958), aff 'd, 271 F.2d 267 (5th Cir. 1959). 16. The Tax Court found that the trusts received additional repayments when the estate transferred mortgages to the trusts as a partial debt settlement. See Geftman, 72 T.C.M. (CCH) at 821. However, as discussed more fully below, the trusts never received any beneficial interest in the mortgages. Even assuming that the trusts had acquired some interest in the mortgages, the June 11, 1985 document making adjusting journal entries and characterizing the purported mortgage transfer as a partial debt settlement was contradicted by contemporaneous documents describing that purported transfer as a purchase. See app. at 135c. Thus we find no evidence to support the assertion that the trusts received additional repayments in the form of a mortgage transfer, and accordingly confine our analysis of the repayments to the $82,764 which the trusts actually received. 19 insignificant on the grounds that such features were not necessary in transactions between related parties. See Geftman, 72 T.C.M. (CCH) at 820-21. To the contrary, however, cases examining transactions between related parties have found the absence of such factors highly significant and have characterized transfers as bona fide loans only where the record contains sufficient objective evidence of an enforceable obligation to repay and a reasonable expectation of repayment. In Baird v. Commissioner, 43 T.C.M. (CCH) 1173, 118081 (1982), the court recognized a bona fide debt between related parties because the transferee had executed promissory notes establishing a payment schedule and charging interest at a rate of ten percent, and had delivered the notes to the transferor prior to . . . receiving the checks, while the transferor had recorded the disbursements on its books as loans. Similarly, in American Processing & Sales Co. v. United States, 371 F.2d 842 (Ct. Cl. 1967), the court found sufficient evidence of an enforceable obligation to repay and a reasonable expectation of repayment in a transaction between related corporations, inasmuch as the transferor held a lien on the transferee's buildings and fixtures and both corporations recorded consistent, definite amounts due on the debt. See id. at 845-46, 856-57. Likewise, in Litton Bus. Sys., 61 T.C. 367, the transferee corporation adopted a resolution prior to the transfer authorizing the corporation to borrow from its parent corporation, and at the time of the transfer both the transferor and transferee recorded the same opening balance of the amount owed by the subsidiary. Moreover, the indebtedness and its essential terms were recorded on the books of both companies and in a substantial amount of correspondence which set forth the existence of a debt obligation, the amount thereof and payments thereon,[and] the provision for interest. Furthermore, the interest rate was reasonable[ ] in light of the prevailing interest rates in the financial community at that time, thedue date [was] within the control of the creditors, and there was a reasonable expectation, at the inception of the [transaction], of repayment . . . based on the[transferee's] established financial history. See id. at 376-80. 20 The Tax Court cited cases such as Baird, American Processing, and Litton for the proposition that the absence of certain formalities may be excused when the transferor and transferee are related entities. See Geftman , 72 T.C.M. (CCH) at 820-21. The court failed to acknowledge, however, that although the courts in those cases did not require the presence of every possible indicium of indebtedness, they did not recognize a debt in the absence of all objective indicia, but rather based their recognition of a debt on numerous objective factors not present in this case. 17 While the foregoing cases demonstrate that the courts have required objective indicia of an obligation to support assertions of indebtedness between related parties, perhaps more significantly, numerous cases, including those relied upon by the Tax Court, have rejected assertions of indebtedness between related parties despite the presence of significant objective evidence that the transfer was intended as a loan. For instance, in Donisi v. Commissioner, 26 T.C.M. (CCH) 327 (1967), aff 'd, 405 F.2d 481 (6th Cir. 1968), the court rejected the assertion that a shareholder's transfers to his closely held corporation were bonafide loans, although the transferee, prior to the transfers, had adopted a formal resolution authorizing it to borrow from the transferor at specified interest rates, had computed and recorded the interest owed on its books, and had made several payments designated explicitly as interest owed on the loans. The court found these factors insufficient, inasmuch as the transferor did not require any notes or other written evidence of indebtedness, and did not establish a repayment schedule or obtain any collateral although the transferee had assets of a kind which _________________________________________________________________ 17. Apart from Baird, American Processing, and Litton, the Tax Court cited only one case that characterized a transfer between related parties as a bona fide debt. That case also relied on objective factors not present in this case, such as a duly executed promissory note and consistent treatment of the transfer on the parties' books andfinancial statements as loan receivables. See Shaken v. Commissioner, 21 T.C. 785, 793 (1954). However, the Shaken court's conclusion that the transfers were loan repayments also rested in large part on an analysis of factors which undermined the Commissioner's assertion in that case that the transfers constituted dividends, an analysis that is inapposite in this case. 21 normally are considered excellent security. Id. at 330. Thus, in Donisi, although the parties had manifested an intent to create a loan through objective factors such as contemporaneously stated interest rates and book entries consistent therewith, the court found it significant that the transferor, like the trusts in this case, did not take readily available measures, such as obtaining notes or collateral, to ensure repayment. In Georgiou, 70 T.C.M. (CCH) 1341, the court found that transfers from a corporation to its shareholder were not bona fide loans, although the corporation had obtained a security interest in the shareholder's assets, established a fixed maturity date, charged the shareholder interest, treated the transfers as loans on its books, and received funds back from the shareholder which the corporation explicitly designated as loan repayments. Despite these objective indicia of indebtedness, the court found that the transfers did not give rise to a bona fide debt, since there was no indication that the shareholder intended toenforce the debt against himself. Id. at 1351. Thus, contrary to the Tax Court's finding that the relatedness of the parties obviated the need for objective evidence of indebtedness, Georgiou demonstrates that even extensive objective evidence may be insufficient to establish the existence of a debt where the close relationship between the transferor and the transferee leaves the transferor discretion as to whether to enforce the debt, rendering any obligation to repay conditional rather than unconditional. Likewise, in Gilbert, 74 T.C. 60, the court rejected the assertion that a transfer constituted a bona fide loan although the transfer was consistently treated as a loan on the books . . . and balance sheets of both corporations, the check . . . included a notation that it was a loan, and the transfer subsequently was repaid in full. Id. at 65. The court found that the characterization of the transfer as a loan on these documents was unpersuasive, since the transferor did not charge interest, obtain a note, require collateral, impose a repayment schedule, or take other measures to ensure repayment. Moreover, the transferor had borrowed the same money at interest and had no business purpose . . . to have subsidized the transferee by 22  `loaning' the same funds without requiring the payment of at least an equivalent rate of interest. Id. at 66. Finally, the transferee's financial difficulties, which raised doubts as to whether the transferee would have funds available to repay, demonstrated that the transfer was economically unreasonable as a loan transaction and precluded the court from recognizing a bona fide indebtedness. Id. Virtually all of the factors that weighed against recognition of a debt in Gilbert are present in this case where the trusts borrowed funds at interest, transferred them to the estate without charging an equal rate of interest and obtaining notes, collateral, or repayment schedules, and without any basis for believing that the estate would be in a position to repay the funds transferred.18 The foregoing cases demonstrate that, contrary to the view adopted by the Tax Court, the mere relatedness of the parties is not a sufficient basis to support characterization of a transaction as a debt in the absence of objective evidence of indebtedness such as notes, collateral, repayment schedules, interest charges, or other measures demonstrating an intent to secure repayment. Rather, these cases demonstrate that transfers between related parties cannot be characterized as bona fide loans unless the totality of the objective evidence reveals that the transferee had an enforceable obligation to repay the sums transferred. The transactions in this case, which did not involve any notes, collateral, repayment schedule, interest charges, or book entries reflecting a loan, bear virtually none of the objective attributes which denote a bonafide _________________________________________________________________ 18. The Commissioner argues, br. at 26-27, that Gilbert is distinguishable because in this case the trusts earned $82,764 in interest whereas in Gilbert the transferor received no interest payments. This argument is circular, as the $82,764 cannot be characterized as interest earned by the trusts unless the trusts' $2.85 million transfer to the estate can be characterized as a bona fide loan based on sufficient objective indicia of an intent to secure repayment. The argument also is unsupported by the record, as the trusts did not charge any interest but merely recovered a portion of the E.F. Hutton interest charges which they incurred in obtaining funds for the estate. Because the trusts recovered only a portion of the $133,627 in interest they paid to E.F. Hutton, see app. at 328, they subsidized the transaction, just as the transferor did in Gilbert, with no economic advantage to themselves. 23 loan, and closely resemble transfers which the courts have refused to characterize as a genuine loan because the transferor failed to take available measures to secure repayment.19 Accordingly, wefind that the objective attributes of the transactions between the trusts and the estate cannot support the Tax Court's conclusion that they gave rise to a bona fide indebtedness. _________________________________________________________________ 19. The Tax Court cited several other cases which, like those discussed above, refused to characterize transfers between related parties as bona fide loans although they bore more objective attributes of a loan than did the transfers in this case. See In re Indian Lakes Estates, Inc., 448 F.2d 574, 578-79 (5th Cir. 1971) (finding that transfer was not a loan in economic substance despite issuance of bonds withfixed maturity dates and interest rates); Wood Preserving Corp. of Baltimore v. United States, 233 F. Supp. 600, 605-07 (D. Md. 1964) (finding that advances were not bona fide loans, despite notation of debt in ledger, as transferee made no enforceable promise to repay and could not have obtained such funds from any reasonable banker on its own credit), aff 'd, 347 F.2d 117 (4th Cir. 1965); Electric & Neon, Inc. v. Commissioner, 56 T.C. 1324, 1328-29 (1971) (holding that disbursements, although recorded on books as balance due and although partially repaid, were not bona fide loans absent notes, maturity dates or repayment schedules), aff 'd, 496 F.2d 876 (5th Cir. 1974) (table); Astleford v. Commissioner, 33 T.C.M. (CCH) 793 (1974) (finding that transfers were not bona fide loans despite interest-bearing promissory notes, notes receivable account entered on books, and significant repayments), aff 'd , 516 F.2d 1394 (8th Cir. 1975); Chism Ice Cream Co. v. Commissioner, 21 T.C.M. (CCH) 25 (1962) (finding that transfer was not bona fide loan despite ledger account entitled note receivable and eventual repayment of entire balance, where no promissory notes were executed or delivered, no interest was charged or paid, and no collateral was given), aff 'd, 322 F.2d 956 (9th Cir. 1963). Notably, in each case cited by the Tax Court as well as in virtually every other case of which we are aware, it was the taxpayer who sought to establish the existence of a bona fide debt while the Commissioner contested its existence. In this case, by contrast, the typical positions are reversed and it is the Commissioner who seeks to prove the existence of a genuine indebtedness. The transfer, however, falls far short of the standards which the Commissioner has advocated and which the courts have adopted in the cases analyzing whether a transfer constitutes a debt. 24
Our conclusion that the contemporaneous intent behind and the objective attributes of the transaction demonstrate that the transaction cannot be characterized as a bona fide loan is consistent with the economic realities surrounding the relationship between the trusts and the estate, as these realities further demonstrate that the transfers did not give rise to a reasonable expectation or enforceable obligation of repayment. As we explained in Fin Hay Realty Co. v. United States, where the same persons occupy both sides of the bargaining table, the form of a transactiondoes not necessarily correspond to the intrinsic economic nature of the transaction, for the parties may mold it at their will in order to create whatever appearance would be of . . . benefit to them despite the economic reality of the transaction. Fin Hay, 398 F.2d at 697. Accordingly, where the same individuals control both the transferor and the transferee, the transaction must be scrutinized according to an objective test of economic reality to determine its true economic nature. Id.20 The Tax Court acknowledged that the  `same persons occup[ied] both sides of the bargaining table'  in this case since the same individuals served as both trustees of the trusts and representatives of the estate. Geftman, 72 T.C.M. (CCH) at 821 (quoting Fin Hay, 398 F.2d at 697). As one trustee-representative explained, [t]rustees, personal representatives, we did everything as one. I never separated it. When questioned as to whether the assets held by the trust belonged to the trusts or the estate, this trusteerepresentative testified that he had no idea. App. at 6061. However, having erroneously cited this common control as a basis for disregarding the absence of objective indicia of indebtedness, the court did not undertake an analysis of _________________________________________________________________ 20. The rule in Fin Hay accords with the general principle that tax consequences must be determined not from the form of the transaction, but rather from its true substance. See Diedrich v. Commissioner, 457 U.S. 191, 195-96, 102 S.Ct. 2414, 2417-18 (1982); Commissioner v. Hansen, 360 U.S. 446, 461, 79 S.Ct. 1270, 1279 (1959); Trans-Atlantic Co. v. Commissioner, 469 F.2d 1189, 1193 (1972) (requiring that transaction amount to debt in substance as well as in form). 25 the economic realities surrounding the transaction. See Geftman, 72 T.C.M. (CCH) at 821. In analyzing the nature of the advances from the trusts to the estate, we cannot ignore the fact that the funds which the estate purportedly borrowed from the trusts were available only because the estate had funded the trusts by making the municipal bond transfers just four months before the transfers back to the estate began. The courts have refused to characterize transfers as debts where the purported debtor conveyed its funds to another entity over which it retained a degree of control only to borrow the same funds back a short time later. See, e.g., Wilken v. Commissioner, 53 T.C.M. (CCH) 965 (1987) (transfers from trusts to taxpayers who had funded the trust were not bona fide loans, despite promissory notes bearing interest and mortgage securing repayment, since taxpayers had retained control over trust assets and thus were `borrowing' their own assets in order to generate deductible interest payments); Ribisi v. United States, 51 A.F.T.R.2d (RIA) 83-961 (N.D. Cal. 1983) (transfers from trust to taxpayer were not a valid loan, despite promissory note, because taxpayer had used trust as conduit through which it cycled the funds purportedly borrowed), aff 'd, 746 F.2d 1487 (9th Cir. 1984) (table). Nor can we disregard the degree of control which the estate exercised over the trusts' assets by virtue of the fact that the estate retained the right to reclaim any and all trust assets for its own purposes at any time. Although the estate did not directly and formally recall the $3 million municipal bond portfolio to the estate until 1987, it did so in economic substance during 1983 and 1984 by having the trusts borrow over $2.85 million against these assets worth $3 million and transferring the proceeds to the estate with no promise to repay or collateral securing repayment. The Commissioner contends, br. at 32, that the transfers should not be viewed as a de facto recall of trust assets because the estate did not issue a formal recall until well after the transfers were complete. This argument, however, focuses on the form which the representatives gave to the transactions rather than their economic reality. Because the transfers effectively conveyed back to the estate 26 virtually all of the equity in the trusts' assets, so that the proceeds from the eventual sale of the bonds had to be used primarily to satisfy the margin debt incurred on behalf of the estate, the transfers in essence depleted the equity in the trusts' portfolio and thus amounted to a de facto recall. While the estate's representatives did not characterize the transactions as an asset recall, these individuals, who also controlled the trusts and were beneficiaries of Trust A, had every incentive to obscure the economic reality that the net economic effect of the transaction was to return all value of the trusts' assets to the estate, inasmuch as these individuals were to receive distributions from Trust A only to the extent that the trusts generated current net income. Although these individuals attempted to characterize the transaction as a profitable endeavor for the trusts in their capacity as creditors lending funds to the estate, because these individuals wielded the power to create whatever appearance would be of . . . benefit to them despite the economic reality of the transaction, Fin Hay , 398 F.2d at 697, we cannot accept this characterization which does not accord with the economic reality that the actual effect of the transaction was to transfer $2.85 million of the equity held by the trusts back to the estate with no assurance that the estate intended to repay these sums to the trusts. A court may ascertain the true nature of an asserted loan transaction by measuring the transaction against the economic reality of the marketplace to determine whether a third-party lender would extend credit under similar circumstances. Scriptomatic, Inc. v. United States, 555 F.2d 364, 367-68 (3d Cir. 1977); see also Fin Hay, 398 F.2d at 697. It is clear that no reasonable third-party lender would have extended $2.85 million of credit with no promise of repayment, no interest charges, no security, no repayment schedule, and no book entries recording a balance due, particularly if that entity did not have capital to lend but rather had to place its assets at risk to borrow the funds at rates of up to 13.25% in order to transfer them to an entity that offered no assurance that it would be in afinancial position to repay the funds. See app. at 178-98. Because this was not a transaction that the market would accept as debt, Scriptomatic, 555 F.2d at 368, wefind that its terms 27 were defined by the relationship between the estate and the trusts as donor and beneficiary and not as debtor and creditor.21 The Commissioner argues that E.F. Hutton's willingness to lend the trusts funds which the trusts then transferred to the estate demonstrates that the transaction between the trusts and the estate was economically reasonable as a debt transaction on the open market. See br. at 33. We disagree. E.F. Hutton lent funds to the trusts on terms radically different from the terms on which the trusts advanced the same funds to the estate. E.F. Hutton secured its loans to the trusts with $3 million in municipal bonds as collateral, charged the trusts substantial amounts of interest, and collected payments monthly. The trusts, by contrast, made no attempt to obtain a security interest in any of the estate's assets, although the estate had real estate holdings that might have served as collateral. Moreover, the trusts did not charge the estate interest or require regular payments, but rather received only four payments in amounts that only partially reimbursed the trusts for the costs they incurred in borrowing from E.F. Hutton. Thus, the contrasts between E.F. Hutton's loans to the trusts, and the trusts' transfers to the estate in fact demonstrate that the latter transaction did not create a debtor-creditor relationship. Moreover, the terms on which the trusts transferred the funds to the estate differed not only from the terms on which third parties would lend those funds, but also from the terms on which the trusts lent funds to other related parties. Edith Kermer, a trustee and beneficiary of Trust B, _________________________________________________________________ 21. We recognize that credit may be extended between related parties on terms that differ from those that would exist on the open market. Thus, while the Commissioner is correct, br. at 33, that a transfer need not be profitable for the transferor in order to constitute a bona fide loan, in this case the transfer was not merely unprofitable in the sense that it did not generate any interest income for the trusts. Rather, it required the trusts to incur substantial costs and risks to their assets with no reasonable expectation that even the principal amount would be repaid. Under the circumstances, which reveal no obligation to repay and no expectation of repayment, we cannot characterize the transaction as a bona fide extension of credit. 28 obtained a loan from the trusts by executing a mortgage on her home in favor of the trusts and a written agreement to repay the trusts by certain dates at an interest rate of one percent above the rate charged to the trusts by E.F. Hutton. See app. at 416-19. The absence of comparable terms surrounding the transfers made to the estate further demonstrates that in economic substance these transfers were not loans made with a reasonable expectation of repayment, but rather were a conveyance of trust assets back to an estate which effectively had exercised its right to reclaim such assets for its own purposes. The economic realities surrounding the transaction, the objective features of the transfer, and the lack of contemporaneous unconditional intent to create an enforceable debt all support Geftman's assertion that the transactions between the trusts and the estate did not give rise to a genuine indebtedness. In the absence of any evidence establishing a bona fide debtor-creditor relationship between the estate and the trusts, we must reject as clearly erroneous the Tax Court's conclusion that the $82,764 which the estate paid to the trusts constituted taxable interest income earned by the trusts in their capacity as creditors rather than non-taxable distributions received by the trusts in their capacity as beneficiaries of an estate that had no distributable net income.