Opinion ID: 77516
Heading Depth: 2
Heading Rank: 1

Heading: Whether the Transfers from Aberdeen Constituted Actual Debts

Text: 22 Debt for Federal income tax purposes connotes an existing, unconditional, and legally enforceable obligation to repay. Hubert Enter., Inc. & Subsidiaries v. Comm'r, 125 T.C. 72, 91, 2005 WL 2293526 (2005). The IRS regulations governing the bad debt deduction define a bona fide debt as a debt which arises from a debtor-creditor relationship based upon a valid and enforceable obligation to pay a fixed or determinable sum of money. 26 C.F.R. § 1.166-1(c). A capital contribution or a gift is not a debt. See id. Courts, in reviewing a monetary transaction to determine whether it constitutes a bona fide debt, must review closely the objective facts of the transaction, Roth Steel Tube Co. v. Comm'r, 800 F.2d 625, 630 (6th Cir.1986), rather than whatever characterization that the taxpayer subsequently chooses to ascribe to it. We have held that taxpayers are liable for the tax consequences of the transaction they actually execute. Selfe v. United States, 778 F.2d 769, 773 (11th Cir.1985). That is, taxpayers are bound by the `form' of their transaction and may not argue that the `substance' of their transaction triggers different tax consequences. Id. 23 The burden of showing that a monetary transfer is a bona fide debt is on the taxpayer. Hubert, 125 T.C. at 91 (citing Roth Steel, 800 F.2d at 630). This burden is a difficult one to meet, especially when the transaction is cast in sufficiently ambiguous terms to permit an argument either way depending on which is subsequently advantageous from a tax point of view. Estate of Leavitt v. Comm'r, 875 F.2d 420, 424 (4th Cir.1989). 24 In Lane, we established a multi-factor test to aid courts in determining whether transfers to a corporation constitute debt or equity. 742 F.2d at 1314. Although Lane involved the question of whether a transfer constituted a debt for purposes of the bad debt deduction under 26 U.S.C. § 166, the Lane test has been applied subsequently in a number of cases in this circuit to determine whether a particular monetary transfer constituted a debt. See, e.g., Selfe, 778 F.2d at 773; In re Hillsborough Holdings Corp., 176 B.R. 223, 248 (Bankr.M.D.Fla.1994). The thirteen Lane factors that should be considered in determining whether a transfer is a bona fide debt are: 25 (1) the names given to the certificates evidencing the indebtedness; 26 (2) the presence or absence of a fixed maturity date; 27 (3) the source of payments; 28 (4) the right to enforce payment of principal and interest; 29 (5) participation in management flowing as a result; 30 (6) the status of the contribution in relation to regular corporate creditors; 31 (7) the intent of the parties; 32 (8) thin or adequate capitalization; 33 (9) identity of interest between creditor and stockholder; 34 (10) source of interest payments; (11) the ability of the corporation to obtain loans from outside lending institutions; 35 (12) the extent to which the advance was used to acquire capital assets; and 36 (13) the failure of the debtor to repay on the due date or to seek a postponement. 37 742 F.2d at 1314-15. We made clear in Lane that these factors are not rigid rules but are rather helpful guidelines to be considered and weighed by the court. Id. at 1315. Additionally, a court is not bound to consider all thirteen of the Lane factors; it needs to weigh only those factors that are relevant to the particular transaction. Id. 38 In expressly adopting the magistrate judge's report and recommendation, the district court applied the Lane factors that it deemed were germane to Ellinger's case and concluded that the transfers paid from Aberdeen to GlobalTel and ProMail did not constitute bona fide debts. The court noted that there were no promissory notes executed in connection with the transfer of funds and that Ellinger could not recall if there was any interest rate agreed upon in connection with the transaction. The court also observed that the funds transferred to GlobalTel and Pro-Mail were not secured by any collateral, nor were any of the funds transferred by Aberdeen ever repaid. In light of these findings, as well as the general lack of formalities attendant to the transactions, the district court concluded that the transfers in question did not constitute bona fide debts as a matter of law. 8 In the absence of a valid debt running from Aberdeen to GlobalTel and ProMail, the district court reasoned that Ellinger could not rely upon COD income to increase his cost basis in his shares of GlobalTel and Pro-Mail. Accordingly, the district court granted summary judgment to the IRS. 39 We conclude that the district court's decision was fundamentally sound. Applying our analysis in Lane, it is clear that the transfers from Aberdeen to GlobalTel and ProMail lacked the traditional indicia of debt. There were no promissory notes evidencing indebtedness on the part of GlobalTel and ProMail. There was no evidence presented to show that the purported loan had a fixed maturity date, which we have previously held is a highly significant feature of a debtor-creditor relationship. Sinnett's Pontiac Serv., Inc. v. Comm'r, 730 F.2d 634, 638 (11th Cir.1984). Ellinger asserted in his deposition testimony that efforts were made to collect the putative debt from GlobalTel and ProMail, but he presented no documentary evidence to show that Aberdeen ever actively attempted to recover the funds that it transferred. Although Ellinger testified that ProMail's comptroller tried to get the money, cash flow . . . when they had it, try to pay that back, R1-14, Ex. D at 29, Ellinger failed to demonstrate a right to enforce payment of principal and interest by showing either a specific protocol for enforcing the loan in the event of a default, or, failing that, a mutually agreed repayment schedule. See Lane, 742 F.2d at 1314. 40 Moreover, Ellinger's evidence as to the parties' intent was based solely on his contention that Aberdeen, GlobalTel, and ProMail agreed at the outset that the transfers would be considered loan obligations. Yet we have instructed that courts must look beyond the self-serving declarations of the parties and examine the objective facts to determine whether the parties intended the advances to constitute debt. Id. at 1316 (citation omitted). One fundamental indicator suggesting an intent to create a loan is the presence of an interest rate; as our predecessor circuit has held, a true lender is concerned with interest. Curry v. United States, 396 F.2d 630, 634 (5th Cir.1968). 41 Ellinger stated in his deposition that he did not recall whether the transfers contained a provision for the payment of interest. During oral argument, his attorney acknowledged that no interest rate was charged in connection with these transfers. The fact that Aberdeen would transfer a total of $548,575 to two fledgling, unprofitable companies without any interest rate provisions, and without any collateral to secure repayment, belies Ellinger's self-serving assertion that the distributions were true, enforceable debts. Rather, the objective facts of the transaction do not evince an intent to create a debt between the companies. 42 We also made clear in Lane that in order for a monetary transfer to be construed as a valid debt, the expectation of repayment must not depend solely on the success of the borrower's business. Lane, 742 F.2d at 1314. In Lane, the taxpayer asserting the existence of a loan indicated that he would demand repayment from the borrower corporations when it was good for [their] business. Id. at 1316. We held that where repayment was in some way tied to the fortunes of the business, it was unlikely to be a bona fide loan to a borrower corporation. Id. (citation omitted). In this case, Ellinger similarly testified that Aberdeen expected to be repaid when GlobalTel and Pro-Mail's businesses were successfully fix[ed] and started turning a profit. R1-14, Ex. D at 28-29. Ellinger further testified that once GlobalTel and ProMail had a positive cash flow, he would seek to be repaid. Id. These statements suggest that Ellinger (and, implicitly, his controlled corporation, Aberdeen) expected to be repaid by GlobalTel and ProMail if and when those companies became profitable and repayment became feasible. Under our analysis in Lane, such evidence militates against finding the transfers to be true debts.