Petition for Writ of Certiorari — Texas Farm Bureau v. United States

™ 7 a !

& 4. = & 76 >. Supreme Court, US

FILED

AUS 18 1984

ALEXANDER L. STEVAS:

No. CLERK I

In The

Supreme Court

of the United States

October Term, 1984

TEXAS FARM BUREAU,

Petitioners,

US.

UNITED STATES OF AMERICA,

Respondent.

Petition For Writ of Certiorari

To The United States Court of Appeals

For The Fifth Circuit

PEELER WILLIAMS, JR.*

3804 Castle Drive

Waco, Texas 76710

HuGu W. Davis, JR.

8300 Calmont, No. 412

Fort Worth, Texas 76116

*Counsel of Record

SOUTHWESTERN LAW PRESS — DALLAS, TEXAS 75208 — (214) 748-6022

QUESTIONS PRESENTED

1. By holding the debt-equity question to be one of law

and reversing the District Court’s judgment on the ver-

dict, has the Court of Appeals departed from the princi-

ples established by this Court in Commissioner v. Duber-

stein, 363 U.S. 278 (1960) and Pullman Standard v. Swint,

456 U.S. 273 (1982)?

2. By applying de novo a twelve factor “laundry list”

developed for transactions between stockholders and

profit corporations to a case involving non-profit affil-

_iated corporations has the Court of Appeals substituted

its own fact-findings for those of the District Court and

jury to the extent that this Court’s supervision is

required?

ill

TABLE OF CONTENTS

Pages

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STATUTORY PROVISION INVOLVED.............. 2

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I. FACTS OF THE TRANSACTION ............ 3

(RP TSA 6. 50). ¢. F re 5

REASON FOR GRANTING THE PETITION ........ 5)

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iv

Table of Authorities

Cases: Page

A. R. Lantz Co. v. United States, 424 F.2d 1330 ....... 6

Brake and Electric Sales Corp. v. U.S..,

kA Re Ck 6 ee aes ee epee ys 6

Commissioner v. Duberstein, 363 U.S. 278........ v.,6,7

Diamond Bros. Co. v. Comm’r, 322 F.2d 725............ 6

Electronic Modules Corp. v. U.S., 695 F.2d 1367 ....... 6

Estate of Mixon v. U.S., 464 F.2d 394 .... 2.0.2.0... 6.8

Falkoff v. Comm’r., 604 F.2d 1045 ..................... 6

Fin Hay Realty Co. v. U.S., 398 F.2d 694 .............. 6

Frank Lyon Co. vy. US., 435 US. S61 ................. 10

Gilbert v. Comm'r., 262 F.2d 512 ............-.....55 6

John Kelley Co. v. Comm’r., 326 U.S. 521.............. 7

Lundgren v. Comm’r., 376 F.2d 623 .......... Se gee 6

Matter of Uneco, Inc., 532 F.2d 1204 ................... 6

Pullman Standard v. Swint, 456 U.S. 273....... v, 3, 6,8

Ragland Investment Co. v. Comm’r., 435 F.2d 118 .... 6

Road Materials, Inc. v. Comm’r., 407 F.2d 1121 ....... 6

Saunders v. Comm'r., 720 F.2d 871 .................... 9

Sayles Finishing Plants, Inc. v. U.S., 399 F.2d 214.... 6

Scriptomatic, Inc. v. U.S., 555 F.2d 364 ................ 6

Slappey Drive Industrial Park v. U:S..,

SE Se ake Poe casas Les 6,8

ee I SNE MR i ost 5 o's x ss cn aeubaccesk es 7

Williams v. Comm’r., 627 F.2d 1032.................... 6

Vv

Table of Authorities (Continued)

Cases: Page

STATUTES:

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No.

In The

Supreme Court

of the Hnited States

October Term, 1984

TEXAS FARM BUREAU,

Petitioners,

Us.

THE UNITED STATES OF AMERICA

Respondent.

Petition For A Writ of Certiorari

To The United States Court of Appeals

For The Fifth Circuit

The Texas Farm Bureau, a non-profit corporation

under the laws of the State of Texas, petitions for a writ of

certiorari to review the judgment of the United States

Court of Appeals for the Fifth Circuit in this case.

OPINIONS BELOW

The opinion of the Court of Appeals (App. A, infra, pp.

A-1-A-16) is reported at 725 F.2d 307 (1984). A further opin-

ion issued by the Court of Appeals with the Order denying

»

—

Appellee’s Petition for Rehearing and Suggestion for

Rehearing En Bane (App. D, infra, pp. A-21-A-24) is re-

ported at 732 F.2d 437 (1984). The District Court wrote no

opinion and is therefore not reported.

JURISDICTION

The judgment of the Court of Appeals (App. C, infra,

p. A-20) was entered on the 21st day of February, 1984.

The Order of the Court of Appeals denying Appellee’s

Motion for Rehearing and Suggestion for Rehearing En

Bane (App. D, infra, pp. A-21-A-. 1) was entered May 21,

1984. No stay of issuance of the mandate was sought or

ordered. The jurisdiction of this Court is invoked under 28

U.S.C. $1254 (1).

STATUTORY PROVISIONS INVOLVED

1. 26 U.S.C. $166, Bad debts, provides in relevant part:

(a) General rule.

(1) Wholly worthless debts. There shall be allowed

as a deduction any debt which becomes worthless

within the taxable vear.

(2) Partially worthless debts. When satisfied that

a debt is recoverable only in part, the Secretary or his

delegate may aliow such debt, in an amount not in

excess of the part charged off within the taxable

vear, as a deduction.

STATEMENT OF THE CASE

This case arises from the Internal Revenue Commis-

sioner’s disallowance of a bad debt deduction which Peti-

tioner Texas Farm Bureau (“TFB”) sought to take in its

1970 fiscal year. Most of the subsidiary facts were undis-

puted, while the ultimate questions were heavily

contested.

I. FACTS OF THE TRANSACTION

The underlying facts, gleaned largely from stipula-

tions, may be summarized as follows: Petitioner TFB is a

non-profit corporation under Texas law. Its primary pur-

pose is to provide a variety of goods and services to people

engaged or interested in agriculture, generally through a

number of non-profit affiliates established and managed

by TFB over the years. TFB and its affiliates are exemp-

ted from ordinary corporate income tax by 26 U.S.C.

§501(cX5), but must pay tax on unrelated business income

under 26 U.S.C. §511. Operating funds for TFB come from

individual membership dues and from management fees

charged to the affiliates. Transactions between TFB and

its affiliate, the Texas Agricultural Marketing Develop-

ment Association (“TAMDA”) are the basis of this suit.

TAMDA was formed to provide cooperative marketing

services to its members, mainly in the livestock business

and related areas. TAMDA’s Board of Directors has

always been the same as TFB’s. Individual members of

TAMDA must belong to TFB. TAMDA has no capital

stock and reiies on member dues and funds advanced

from TFB to meet operating and organizational expenses.

Relevant portions of the contract between TFB and

TAMDA appear in footnote 2 of the Court of Appeals

opinion, 725 F.2d n.2 at 309, Appendix A infra,

pp. A-3-A-4.

TFB advanced a total of $166,946.02 to TAMDA

according to a schedule set out in the Court of Appeals

opinion, 725 F.2d at 309, Appendix A, infra, p. A-.

Promissory notes bearing 7 percent interest with no fixed

maturity date were given for $50,000 of the 1967 advance.

The remainder of the advances were carried on TAMDA’s

4

by TFB over the years. TFB and its affiliates are exemp-

ted from ordinary corporate income tax by 26 U.S.C.

§501(c\5), but must pay tax on unrelated business income

under 26 U.S.C. §511. Operating funds for TFB come from

individual membership dues and from management fees

charged to the affiliates. Transactions between TFB and

its affiliate, the Texas Agricultural Marketing Develop-

ment Association (“TAMDA”) are the basis of this suit.

TAMDA was formed to provide cooperative marketing

services to its members, mainly in the livestock business

and related areas. TAMDA’s Board of Directors has

always been the same as TFB’s. Individual members of

TAMDA must belong to TFB. TAMDA has no capital

stock and relies on member dues and funds advanced

from TFB to meet operating and organizational expenses.

Relevant portions of the contract between TFB and

TAMDA appear in footnote 2 of the Court of Appeals

opinion, 725 F.2d n.2 at 309, Appendix A infra,

pp. A-3-A-4.

TFB advanced a total of $166,946.02 to TAMDA

according to a schedule set out in the Court of Appeals

opinion, 725 F.2d at 309, Appendix A, infra, p. A-4.

Promissory notes bearing 7 percent interest with no fixed

maturity date were given for $50,000 of the 1967 advance.

The remainder of the advances were carried on TAMDA’s

beoks as accounts payable and on TFB’s books as

accounts receivable, with no specified interest rate. A

schedule of repayment was not established for the ad-

vances. TAMDA made a $3,060 payment to TFB in

October 1966 on the advances, but no other during the

period in question.

TFB charged TAMDA no management fee until 1968.

a a eT Te mle

)

In that fiscal year, $73,400 was assessed of which

TAMDA paid $25,466.72. TFB wrote the remainder off as

uncollectible. These amounts are not in question in this

suit.

On its fiscal 1970 tax return, TFB deducted as an uncol-

lectible bad debt $164,118.13, representing unrepaid

TAMDA advances for fiscal 1961 through fiscal 1970.

There was no litigation between TAMDA and TFB and

TAMDA functioned throughout this period.

Il. LEGAL PROCEEDINGS

On audit. the Commissioner of Internal Revenue

denied the deduction, concluding that the advances did

not create debt within the meaning of 26 U.S.C. §166, but

were rather in the nature of contributions to capital.

TFB paid the assessed deficiency, fruitlessly claimed for

refund and then brought suit under 28 U.S.C. §§1346(a)(1)

and 26 U.S.C. §7422 in the United States District Court

for the Western District of Texas.

REASUN FOR GRANTING THE PETITION

1. To resolve a conflict among the Circuit Courts of

Appeal concerning the legal nature of and appropriate

standard of appellate review for the debt-equity question.

ARGUMENT

In the case at bar, the District Court jury found that the

Texas Farm Bureau (“TFB”) had properly claimed its bad

debt deduction under 26 U.S.C. § 166 for the amounts

advanced to its affiliate. The Court of Appeals reversed

the judgment based on the fact-findings, holding the debt-

equity issue presented to be a question of law, reviewable

under the broad de novo standard of appellate review. 725

F.2d 307 (5th Cir. 1984), App. A, infra, pp. A-1-A-16. TFB

6

contends that the Court of Appeals decision is erroneous

because the proper analysis for this type of question is

that indicated by this Court’s decisions in Commissioner

v. Duberstein, 363 U.S. 273 (1960), and Pullman Standard

v. Swint, 456 U.S. 273 (1982), inter alia, and followed by

the majority of the Circuit Courts of Appeals: debt-equity

controversies ultimately present a question of fact, sus-

ceptible of jury resolution and properly reviewable only

under the deferential standard of review accorded the

trial court’s fact-findings.

Review of this case by this Court would resolve the

conflict in approach and analysis of this important ques-

tion and provide much needed guidance for the federal

courts, taxpayers and the government. Currently only the

Third, Fifth and Eleventh (following pre-1981 precedent)

Circuits consistently treat debt-equity as a legal matter.'

Ninth Circuit precedent is conflicting,* while the

remainder of the federal appellate courts as well as the

U.S. Claims Court treat debt-equity as a question of fact.°

| Fifth Circuit other than the case at bar, see, e.g., Estate of Mixon v.

U.S., 464 F.2d 394 (5th Cir. 1972); Slappey Drive Industrial Park v.

U.S., 561 F.2d 572 (5th Cir. 1977) 3rd Circuit: Fin Hay Realty Co. v.

U.S. 398 F.2d 694 (3rd Cir. 1968); Scriptomatic, Inc. v. U.S., 555 F.2d

364 (3rd Cir. 1977). The panel opinion’s citation of Diamond Bros.

Co. v. Commissioner, 322 F.2d 725 (3rd Cir. 1963), 725 F.2d n.9 at 312

(App. A, infra, n. 9 p. Al0) appears to be out of date.

¢ Compare Lundgren v. Comm’r, 376 F.2d 623 (9th Cir. 1964) with A.

R. Lantz Co. v. U.S., 424 F.2d 1330 (9th Cir. 1970).

’ Federal Circuit: Electronic Modules Corp. v. U. S., 695 F.2d 1367

(1982);

lst Circuit: Brake and Electric Sales Corp. v. U. S. 287 F.2d 426

(1961);

2nd Circuit: Gilbert v. Comm’r., 262 F.2d 512 (1958);

4th Circuit: Road Materials, Inc., v. Comm’r, 407 F.2d 1121 (1969);

6th Circuit: Ragland Investment Co. v. Comm’r, 435 F.2d 118 (1970);

7th Circuit: Falkoff v. Cumm’r, 604 F.2d 1045 (1979);

8th Circuit: Matter of Uneco, Inc., 532 F.2d 1204 (1976);

10th Circuit: Williams v. Comm ’r, 627 F.2d 1032 (1980);

see also Sayles Finishing Plants, Inc. v. U.S., 399 F.2d 214 (Ct. C1.

1968).

Authority from this Court’s decisions supports the

majority rule. In John Kelley Co. v. Commissioner, 326

U.S. 521 (1946), the decision treated a common variant of

debt-equity (interest versus dividends) as a question of

fact, properly determined by the Tax Court and not the

reviewing Court of Appeals. Further, on at least one occa-

sion, this Court has implicitly assumed that the bad debt

deduction poses questions for the trier of fact. U.S. v.

Generes, 405 U.S. 93, 104 (1972). In the landmark case of

Commissioner v. Duberstein, cited above, this Court was

confronted with a government proposed paradigmatic

“factor” test highly analogous to the Fifti Circuit test in

this case, as a means to determine whether a transaction

was or was not a gift under the Tax Code. Mr. Justice

Brennan, writing for the majority at 363 U.S. 288-289,

rejected the argument that this gave rise to a question of

law:

The conclusion of whether a transfer amounts to a

gift is one that must be reached on consideration of

all the factors . . . Decision of the issue presented in

these cases must be based ultimately on the applica-

tion of the fact-finding tribunal’s experience with the

mainsprings of human conduct to the totality of the

facts of each case. The non-technical nature of the

statutory language, the close relationship of it to the

data of practical human experience and the multipli-

city of relevant factual elements with their various

combinations, creating the necessity of ascribing the

proper force to each, confirm us in our conclusion

that primary weight in this area must be given to the

conclusions of the trier of fact.

Appellate review is specificaily addressed at 290-291:

One consequence of this is that appellate review of

determinations in this field must be narrow. Where a

8

jury has tried the matter upon correct instructions,

the only inquiry is whether it cannot be said that

reasonable men could reach differing conclusions...

The rule itself applies also to factual inferences from

undisputed basic facts . . . as will on many occasions

be presented in this area.

That this holding has a much broader application than

the meaning of “gift” cannot be doubted. The Sixth Cir-

cuit has held that Duberstein directly controls appellate

review of debt-equity cases. See Ragland Investment

Company v. C.I.R., 435 F.2d 118 (6th Cir., 1970) at 119-

120, which, like John Kelley Co., cited above, concerned

interest versus dividends.

More recently, this Court cited Duberstein in its discus-

sion of the primacy of the fact-finder’s role in determining

issues involving intent. Pullman-Standard v. Swint, 456

U.S. 273, 288 (1982). While agreeing that the debt-equity

question ultimately involves the intent of the parties, see

Estate of Mixon v. United States, 464 F.2d 394, 407 (1972),

the Fifth Circuit has consistentiy sidestepped the ulti-

mate factual nature of the intent inquiry via a dichotomi-

zation into and “subjective intent,” id., the former of

which appears to be the sum of the twelve factor Mixon

paradigm and the latter merely a factor, generally to be

disregarded as self-serving. See generally Estate of

Mixon, supra, Slappey Drive Industrial Park v. United

States, 561 F.2d 572 (5th Cir. 1977) and others cited in the

appellate opinion.

Petitioner TFB’s position throughout the course of this

lawsuit has been that creation of “debt”, like “gift”, is

controlled by the intent of the parties and that even in a

situation, as here, where there are numerous “undisputed

basic facts,” Duberstein, supra, the ultimate inference —

9

debt or equity, loan or contr‘bution to capital — remains

factual, based on “the fact tinding tribunal’s experience

with the mainsprings of human conduct,” id., and was

properly determined by the jury in the District Court.

Despite this line of authority above and its dominating

position in the majority of the Circuits, and despite its

own holdings that other debtor-creditor relationships

present questions of fact,‘ and despite the fact that this

was a case of first impression involving transactions

between two non-profit corporate affiliates, the Fifth Cir-

cuit treated the debt-equity issue as one of law and re-

versed the District Court and the verdict. The opinion on

motion for rehearing makes clear that advances between

non-profit entities such as in this case and advances from

a shareholder to an ordinary profit-seeking corporation

are to be subjected to the same standard, which how-

ever, is apparently factually distinct, as a matter of law,

from other types of debtor-creditor relationships (Motion

denying Rehearing, 732 F.2d 437 at 438. App. D, infra, pp.

A-21-A-22). This apparent rule that a corporate debt-

equity question is a law question and that non-corporate

debtor-creditor relationship questions are fact questions

is seriously flawed. If consistently followed, the factual or

legal nature of the question and thus breadth of appellate

review hinge not upon the substance of the transaction,

“the totality of the facts of each case,” Duberstein at 289,

but rather upon the legal status of the parties involved.

Despite the Court of Appeals’ Mixon-factor analysis of

the objective factors of the case, ultimately what emerges

is a decision based on form rather than substance. Such

decisional rules have always been disapproved by this

' See e.g.. Saunders v. Commissioner, 720 F.2d 871 at 873 (Sth Cir.

1983).

10

Court. See, e.g., Frank Lyon Co. v. United States, 435

U.S. 561, 573 (1978).

An additional difficulty with the Court of Appeals deci-

sion is the lack of a-meaningful rationale for treating the

question as a matter of law. While citing four cases to the

contrary, the panel opinion merely proclaims that:

Courts generally bear responsibility for applying

debt-equity factors; characterization of an advance

as either debt or contribution to capital presents

primarily a question of law. (725 F.2d at 311-312,

App. A, infra, p. A-10).

and then proceeds to selectively analyze the Mixon fac-

tors, downplaying some, emphasizing others and ruling

others out as irrelevant. 725 F.2d at 312-314, App. A, infra,

pp. A-10-A-15.

This is not statutory or constitutional construction or

any other traditional question of law analysis. There is no

question presented that “bad debt” has any other than an

ordinary meaning. This is simply a Court of Appeals re-

deliberating a set of subsidiary facts and substituting

its own findings for those of the District Court jury

without benefit of witnesses, live testimony and an oppor-

tunity to judge credibility. This was precisely what this

Court rejected in John Kelley Co., Duberstein and Swint.

This is precisely the error the majority of Circuits have

avoided in treating debt-equity as a question of fact, and

giving appropriate deference to the fact-finder’s conclu-

sions. TFB respectfully submits that the Fifth Circuit

improperly reversed this case.

11

CONCLUSION

Resolution of this question would provide a greater

degree of certainty and uniformity in the law of taxation

across this country. It would be an inestimable service to

the taxpayers and litigators of this country. For the fore

going reasons, then, Petitioner Texas Farm Bureau

respectfully requests that review of this case be granted.

Respectfully submitted,

ob ie Wires

Peeler Williams, Jr.

Attorney at Law

ugh W. Davis, Jr.

Attorney at Law

12

CERTIFICATE OF SERVICE

I hereby certify that service of this document has

been made in accordance with United States Supreme

Court Rule 28 by placing four copies of same in an enve-

lope, first class, postage paid, properly addressed to:

Mr. Glen L. Archer, Jr.

Assistant Attorney General

Tax Division

Department of Justice

Washington, D.C. 20530

and by placing three copies of same in an envelope, first

class, postage paid, properly addressed to:

Honorable Rex E. Lee

Solicitor General

Department of Justice

Washington, D.C. 20530

and depositing the above with the United States Postal

Service. Vb ‘wv AM, ie

Peeler Williams, Jr.

Attorney for Petitioner

Autvsrag I9E7

A-1

APPENDIX A

TEXAS FARM BUREAU,

Plaintiff-Appellee,

Vv.

UNITED STATES of America,

Defendant-Appellant.

No. 82-1355.

United States Court of Appeals,

Fifth Circuit.

Feb. 21 1984.

Rehearing and Rehearing En Banc

Denied May 21, 1984.

Appeal from the United States District Court for the

Western District of Texas.

Before CLARK, Chief Judge, GOLDBERG and

POLITZ, Circuit Judges.

GOLDBERG, Circuit Judge:

With Congress’ dedicated cultivation, the tax code has

prospered and thrived, achieving a rate of growth that

tillers of non-legislative soil would be hard-pushed to

match. Despite the code’s phenomenal size and detail,

courts must still contend with a particularly persistent

and pesterous ambiguity. The problem lies not in separ-

ating the seed from the chaff, but in telling debt from

equity.

Debt-equity questions commonly involve a corporation

and its shareholders — the issue being whether monies

advanced by the shareholder to the corporation consti-

tute a loan or a contribution to capital. Because classifi-

ee

A-2

cation of such advances as either debt or equity can pro-

duce significant tax consequences, courts frequently

have to go beyond the form and into the substance of the

particular transaction. As a consequence, courts have

developed a set of factors to which they look in resolving

debt-equity controversies.

Today we deal with a close cousin of the debt-equity

ambiguity. This case poses the same, * loan versus con-

tribution to capital” question present in the shareholder-

corporation context. We must decide whether advances

by one non-profit corporation to another separate, yet

closely linked non-profit corporation constitute loans or

contributions to capital. The government disagrees with

the contributing corporation s characterization of the

transaction as a loan and the corporation’s deduction of

the unrepaid advances as a bad debt. Fortunately, the

precedent derived from debt-equity cases supplies an

effective pesticide to eliminate ambiguity in the instant

case. Taking guidance from past judicial solutions to

debt-equity puzzles, we conclude that the advances in

question constituted contributions to capital and not

loans.

i. FACTS

Taxpayer, the Texas Farm Bureau (“TFB”) is a non-

profit corporation, organized and existing under the laws

of the State of Texas. TFB’s primary purpose is to provide

goods and services, including educational benefits, polit-

ical lobbying services, life and property insurance, and

product marketing services, to people engaged or inter-

ested in agriculture. These services are generally pro-

vided through several TFB affiliates which TFB has

established over the years. TFB generates funds for its

Se Te em

A-3

operations through individual membership dues and

management fees charged to its affiliates. This case

involves transactions between TFB and one of its affil-

iates, Texas Agricultural Marketing Development Asso-

ciation (““TAMDA”).

Incorporated in 1961 pursuant to the Cooperative Mar-

keting Act of the State of Texas,' TAMDA was created to

furnish cooperative marketing services for its members

who produce livestock and other agricultural goods.

From its inception TAMDA’s board of directors has con-

sisted of individuals holding corresponding offices on

TFB’s board. Membership in TFB constitutes a prerequi-

site for membership in TAMDA. Formed with no capital

stock, TAMDA has relied on membership fees of $5.00 per

member and advances from TFB to meet operating and

organizational expenses.

The advances from TFB were made pursuant to an

April 26, 1961, agreement between TFB and TAMDA

(“the agreement’). The agreement was signed on behalf

Currently codified at Tex.Agric.Code. Ann. §52.001 et seq. (Vernon

1982).

- The agreement (as read into the record) provided, in pertinent part:

In consideration of the premises | sic] promises and of the mut-

ual covenants herein contained, the parties hereto agree to as

follows: Farm Bureau agrees and covenants as follows: (a) To

provide any and all managerial and clerical services necessary

for the conduct of business of the association; (b) To furnish all

facilities necessary for the operation of the association; (¢) Such

facilities shall include but are not limited to office space, office

furniture and equipment, files, filing cabinets, telephone service,

local and long distance, stationery, postage and supplies; (d) To

use its good offices, influence and prestige in promoting the

general welfare of the association and to cooperate with the

association in carrying on any informational or educational pro-

grams designed and intended to promote the association; (e) Not

to incur any indebtedness or create any obligations on behalf of

A-4

of each party by J. H. West, president of both organiza-

tions. It provided that TFB would supply all manage-

ment and clerical services for TAMDA. In return,

TAMDA agreed to reimburse TFB for expenditures made

on TAMDA’s behalf and to pay TFB “reasonable man-

agement fee.”’* The following schedule sets out the yearly

totals of TFB’s advances to TAMDA:

Fiscal Year Amount Advanced

Ending by Texas Farm

October 31 Bureau Cumulative Total

1961 $ 1,398.10 $ 1,398.10

1962 1,482.37 2.88.47

1963 3,133.97 6,014.44

1964 3,399.35 9,413.79

1965 6,461.77 9,413.79

1966 1,690.41 17,875.56

1967 65,128.85 82,694.82

1968 0 82,694.82

1969 80,000.00 162,694.82

1970 4,251.20 166,946.02

the association, neither implied or otherwise, unless specifically

authorized by the association in writing; (f) To be covered at all

times in the implementation of this management agreement by

the provisions, spirit and intent of the articles of that corporation

and bylaws of the association.

Number 2. The association [TAMDA] agrees and covenants

as follows: (a) Subject only to the conditions hereof and on pres-

entation of itemized account of expenditures and expenses

incurred by Farm Bureau on behalf of and in the interest of the

association, the association shall reimburse Farm Bureau for

such expenditures and expenses within 30 days of the close of its

fiscal year; (b) Pay a reasonable management fee to Farm Bureau

as may be mutually agreed to between the association and the

Farm Bureau from time to time.

This agreement shall take effect on date of execution and shall

continue in full force and effect from such date until the end of the

current fiscal year of the association and from year to year

thereafter.

Record, Vol. II, pp. 72-73.

3 TFB did not charge TAMDA management fees during the period

from 1961 through 1967. In 1968, TFB charged a management fee of

$73,400. Of this amount TAMDA paid $25,466.72 and TFB wrote off

the remaining $48,933.28 as uncollectable. None of that amount is

included in the advances in question in this lawsuit.

A-5

Promissory notes, bearing a7 percent interest rate but

with no fixed maturity dates, evidenced $50,000 of the

1967 advance.‘ The notes are not part of the record, how-

ever, as they have been either lost or destroyed. The par-

ties never established any fixed repayment schedule, and

TAMDA never paid any interest on the notes.

Other than the $50,000 advance in the 1967 fiscal year,

none of the advances made to TAMDA were evidenced by

a note, bond, or other obligation. Furthermore, the par-

ties made no provision for payment of interest on any of

this ““nonevidenced indebtedness.” Except for the partial

payment of a management fee assessment? and a $3,000

payment made October 26, 1966, TAMDA made no pay-

ments towards the management fees or in repayment of

advances.

TFB advanced TAMDA an additional $84,351.20 dur-

ing the 1969 and 1970 fiscal years, despite a 1968 write off

of $48,933.28 in management fees owed by TAMDA.

Then, in its return for fiscal 1970, TFB deducted as an

uncollectible bad debt $164,118.13, representing unre-

paid TAMDA advances made from 1961 through 1970.

No court action by TFB against TAMDA preceded the

write-off. TAMDA never ceased to do business during the

1969-1970 period and was operating at the time of trial.

On audit, the Commissioner of Internal Revenue

denied the bad debt deduction. Taking the position that

the $164,118.13 in advances constituted contributions to

capital that did not become wholi._: worthless in 1970, he

concluded that the advances did not create a bona fide

' The $65,128.85 advanced during the 1967 fiscal year included

$50,000 furnished to establish a custodial account, as required by

the United States Packers and Stockyard Act. 7 U.S.C. §§ 181-229.

See supra, n. 3.

A6

debt. Accordingly, the Commissioner assessed deficien-

cies. TFB paid the amounts assessed and, following

denial of its refund claims, sued for a refund in district

court.®

Il. PROCEDURE BELOW AND ISSUES

»ON APPEAL

The case was tried before a jury. At the close of TFB’s

case the government moved for a directed verdict. The

government argued that because the parties’ stipulations

resolved any conflict regarding “operative facts,” the

court should determine as a matter of law whether the

advances constituted debt or contributions to capital.

The court denied the motion. Subsequently, the jury

returned a verdict in favor of the taxpayer, finding that

the advances were loans, that TFB held a reasonable

expectation of repayment when the advances were made,

and that 98% of the debts became worthless in fiscal year

1970. The court denied a government motion for judg-

ment notwithstanding the verdict or, in the alternative,

for a new trial.

On appeal, the government argues that the trial court

erred in submitting to the jury the issue of whether the

advances constituted capital contributions or loans.

Rather, as a question of law, the issue should have been

decided by the court. In addition, the government con-

tends that given the stipulated facts, the court erred in

not holding the advances to be capital contributions.

* The suit seeks a refund for the years 1967, 1968 and 1970. Although

I.R.C. § 501(cX5) exempts TFB from the regular corporate income

tax, the organization remains subject to tax on unrelated business

income under !.R.C. §511. TFB’s bad debt deductions eliminated its

1970 unrelated business income liability and generated net operat-

ing loss carrybacks to 1967 and 1968.

A-7

Ill. ANALYSIS

As we noted above, the issues in this case closely cor-

respond with those.arising in common debt-equity cases

— cases involving advances from a shareholder to a cor-

poration. Loan transactions between a corporation and

its shareholders require special scrutiny primarily

because of the lender/shareholder’s dual interest in the

corporation. See Tomlinson v. 1161 Corporation, 377 F.2d

291, 296 (5th Cir. 1967). One manifestation of this dual

interest is that, depending on how an advance is struc-

tured, the lender’s ownership of stock may, in itself, effect

a return of capital. Allowing the lender to write off what

is essentially an equity interest as a bad debt produces a

deduction that corresponds with no real loss.

The advance in the case at bar, however, did not run

from shareholder to corporation. Rather, TFB, one non-

profit corporation made advances to TAMDA, aseparate

non-profit corporation. Nevertheless, the circumstances

here move us to drawn an analogy to profit corporations

and their shareholders.In this case, one of the parties

seeks tax advantages through the same technique used

by shareholders and profit corporations — proclaiming

in words but not in deeds that money put into the corpora-

tion constitutes debt rather than capital contributions.

TFB holds a substantial interest in TAMDA — one com-

parable to the interest of shareholders in a profit corpora-

tion. Specifically, TAMDA was formed to meet the needs

of certain of TFB’s members. Record, Vol. 1, p. 229; Trial

Transcript, p. 26. The same individuals sit on both boards

of directors. TAMDA’s members, the analogs of share-

holders in a profit corporation, are a subgroup of TFB’s

members. To the extent that the TFB advances meke up

A-8

part of TAMDA’s financial structure, and to the extent

that TAMDA’s members benefit financially from TAM-

DA’s success a portion of TFB’s membership also bene-

fits. Therefore, TFB’s functioning as an organizational

proxy for its members, possesses an interest in TAMDA

very similar to an equity or shareholder interest.

[1] Given such an interest, the transaction at issue

demands the kind of scrutiny regularly given debt-equity

controversies. In resolving such controversies courts

have looked to the circumstances surrounding the pur-

ported loan transaction. Attempts to make this process

more rational and consistent have produced a list of spe-

cific factors commonly relevant to debt-equity determi-

nations.’ They are:

(1) the names given to the certificates evidencing

the indebtedness;

(2) the presence or absence of a fixed maturity date;

(3) the source of payments;

(4) the right to enforce payment of principal and

interest;

(5) participation in management flowing as a

result;

(6) the status of the contribution in relation to regu-

lar corporate creditors;

(7) the intent of the parties;

' The struggle to exterminate debt-equity ambiguities has a long

history. See, e.g.. Slappey Drive Industrial Park v. United States,

561 F.2d 572d (5th Cir. 1977); Estateof Mixon v. United States, 464

F.2d 394 (5th Cir. 1972). Diilin v. United States, 433 F.2d 1097 (5th

Cir. 1970); Tyler v. Tomlinson, 414 F.2d 844 (5th Cir. 1969); Berko-

witz v. United States, 411 F.2d 818 (5th Cir. 1969(; Curry v. United

States, 396 F.2d 630 (5th Cir.), cert. denied, 393 U.S.967,.89 S.Ct. 401,

21 L.E.2d 375 (1968); Tomlinson v. 1661 Corp. 377 F.2d 291 (Sth Cir.

1967); United States v. Snyder Bros. Co., 367 F.2d 980 (Sth Cir. 1966):

Montclair, Inc. v. Commissioner of Internal Revenue, 318 F.2d 38

(5th Cir. 1963); Rowan v. United States, 219 F.2d 51 -{Sth Cir. 1955).

A-9

(8) “‘thin; or adequate capitalization;

(9) identity of interest between creditor and

stockholder;

(10) source of interest payments;

(11) the ability of the corporation to obtain loans

from outside lending institutions;

(12) the extent to which the advance was used to

acquire capital assets; and

(13) the failure of the debtor to repay on the due date

or to seek a postponement.

Estate of Mixon v. United States, supra, 464 F.2d at

402.

Many of these factors are relevant in this case.

Rather than being tailored only to contrast debt with

equity in profit corporations, most of the factors focus

on the definition of debt under the tax code." They

transcent the differences between a shareholder’s

equity interest and TFB’s interest in TAMDA. While

we exclude consideration of certain factors in this case

because of the particulars of the transaction, such

would be the procedure in most debt-equity cases. Even

with respect to traditional debt-equity cases, consider-

ation of the factors requires not a simple counting pro-

* Judge Brown described the function of the factor analysis in Tom-

linson v. 1661 Corporation, sv ora.:

In the course of determining whether a particular transaction

creates a valid and subsisting “indebtedness” within the statutory

meaning, this court has in the past analyzed the pertinent facts of

the transaction in connection with certain criteria considered to be

controlling. Generally, these criteria are designed to disclose the

real nature of the transaction in question — that is whether it

exhibits the characteristics of a bona-fide loan to the corporation

which is expected, indeed, may be compelled, to be repaid in full at

some future date, or whether as a formalized attempt to achieve the

desired tax result while lacking in necessary substances, it merely

parades under the false colors of such a transaction.

377 F.2d at 295.

A-10

cess, but an evaluation. Tyler v. Tomlinson, supra, 414

F.2d at 848, Slappey Drive Ind. Park v. United States,

supra, 561 F.2d at 581. Depending on the particular facts

of a case, different factors come to the fore. Slappey, 561

F.2d at 581; Curry v. United States, supra, 396 F.2d at

633-34.

A. Debt or Capital Contributions —

A Question of Law

Courts generally bear responsibility for applying

debt-equity factors; characterization of an advance as

either deot or contribution to capital presents primar-

ily a question of law.° Estate of Mixon v. Uniied States,

supra, 464 F.2d at 402; see also Slappey Drive Indus-

trial Park, supra, 561 F.2d at 582, n. 17; Tyler v. Tom-

linson, 414 F.2d at 850. We perceive no reason to

deviate from this general rule under the facts of the

instant case.

[2] The only exception to debt-capital contribution

determination as a matter of law arises when a court

must rely on the parties’ subjective intent, factor

number seven. Issues of intent pose questions of “pure

fact.” Bryam v. United States, 705 F.2d 1418 (5th Cir.

1983}; see also Pullman-Standard v. Swint, 456 USS.

273, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982). But, reliance

on subjective intent and the submission of the debt-

capital contribution question to a jury becomes neces-

sary only when a court’s analysis of other, objective

factors fails to provide clear signals. The Mixon court

stated that where “the objective facts of the case are

ambiguous and dc not result in a clear manifestation of

® Contra, see Electronic Modules Corp. v. United States, 695 F.2d

1367, 1371 (Fed.Cir. 1982); Sayles Finishing Plants, Inc. v. United

States, 399 F.2d 214,218, 185 Ct. Cl. 196 (1968); Diamond Bros. Co. v.

Commissioner, 322 F.2d 725, 730 (3rd Cir. 1963); Gilbert v. Commis:

sioner, 262 F.2d 512,513 (2d Cir.), cert. denied, 359 U.S. 1002,79S.Ct.

1139, 3 L.Ed.2d 1030 (1959).

‘ A-11

objective intent, then subjective intent is relevant on

the issue.”” Mixon, supra, 464 F.2d at 407. The court,

thouzh, in Tyler v. Tomlinson, supra, 414 F.2d 844,

pointed out that reliance on subjective intent should

indeed be the exception.

'Tax law requires that creditorship have genuine

existentiality (citation omitted). This requires more

than a declaration of intention to create an

indebtedness and more than the existence of corpo-

rate paper encrusted with the appropriate nomencla-

ture captions.

If appellants mean to say that a mere showing of an

intent to create an indebtedness and the existence of

something called “notes” is sufficient to take their

case to the jury, we must disagree. If that were true,

every debt-equity case would require a jury verdict

no matter how transparent the attempt at tax avoi-

dance. We, therefore, look not to mere labels or to the

self-serving declarations of the parties, but to the

more reliable criteria of the circumstances surround-

ing the transaction.

414 F.2d at 850.

TFB argues that the instant case falls within the

exception where consideration of subjective intent is

necessary. Maintaining that the facts stipulated to in the

trial court left substantial ambiguity as to the import of

the relevant, objective, debt-equity factors, TFB argues

that the issue of intent was properly submitted to the

jury. Determination of this first issue, therefore, requires

an analysis of the relevant, objective factors surrounding

TFB’s advances te TAMDA.

B. Debt or Capital Contributions

the Objective Factors

Turning to that analysis, we note that three factors

point weakly towards debt. Factor one, the names given

A-12

to the certificates evidencing the indebtedness, suggests

debt with respect to $50,000 of the advances. “Notes”

evidenced that amount of the $166,946.02 total.'!” This

indicator has little force, however. After the original

notes were either lost or destroyed,'! the parties never

issued new notes to replace them. In addition, of the

twelve “objective” Mixon factors, factor one has the larg-

est subjective content. The parties’ decision to call the

certificates “notes” sheds little light on the transaction’s

real substance. In any case, to the limited extent that

factor one indicates debt, we find other factors

overriding.

Factor nine, identity of interest between creditor and

shareholder, also weighs lightly in the instant analysis. It

applies specifically to the situation where shareholders

have advanced funds to their corporation. The focus is on

whether a contributing shareholder owns the same por-

tion of the company’s stock as he does of the purported

debt. If “proportionality” exists, how the contributor

breaks down the advance between debt and equity will

not affect control of the company. See Slappey Drive Ind.

Park v. United States, supra, 561 F.2d at 583. In such

circumstances tax considerations may well be the prim-

ary force in the contributor’s characterization of the

transaction. Strictly speaking, the factor does not apply

to the case at bar, one involving an advance between two

non-profit corporations. The underlying notion of iden-

tity of interest does have relevance, however. A complete

identity of interests would exist between TFB as creditor

and TFB as representative of TAMDA’s members if the

“TFB advanced $114,198.13 without a note or other indicia of

indebtedness.

'! See supra, p. 309.

A-13

two organizations had identical memberships. Because

TAMDA’s members comprise only a subgroup of TFB’s

members, symmetry of interests is incomplete. The factor

thus cuts somewhat in favor of a finding of debt. But,

even its limited significance fades in the light of the other

factors.

Next we observe that the agreement between TFB and

TAMDA established a fixed due date for repayment of

the advances. Again, however, the circumstances of this

ciuse negate this factor’s importance. Although the

agreement between TAMDA and TFB required repay-

ment of the advances within 30 days of the close of each

year, that provision was a dead letter. TFB advanced

money to TAMDA year after year, despite TAMDA’s

failure to comply with the repayment provision.

Moreover, the very limited outside financial resources of

TFB,'2 coupled with the complete identity between the

two organizations’ board of directors, makes illusory the

notes’ payment on demand provisions. See Tyler v. Tom-

linson, supra, 414 F.2d at 849.

Turning to the remaining, relevant factors,'*’ we find

that they unwaveringly indicate that the advances were

not debt. TAMDA’s dependence on its earnings to repay

TFB’s advances is one illustration. The only documented

nonearnings source for repayment of TFB lay in dues

\2 See infra, p. 313.

'83Two of the Mixon factors have no bearing on the instant case.

Factor five. whether the source of the advances took an increased

management role in the recipient, cuts neither way because of the

complete identity among management personnel in TAMDA and

TFB. No increase in management role was possible for TFB. Ability

to obtain loans from outside lending institutions, factor eleven,

provides no help either. Unless TFB or its individual members

guaranteed the debt, TAMDA never attempted to secure credit from

outside sources.

A-14

paid by TAMDA’s members. But, given a yearly dues

income of only $3,000,:* , TAMDA would have to look

elsewhere to repay TFB — i.e., to the commissions it

charged for marketing services. Record Vol. I, p. 104. The

dependence on membership dues also raises the factor of

inadequate capitalization. With such limited resources,

TAMDA could hardly have been more tinly capitalized.

TFB’s “right to enforce payment of principal and inter-

est’’ was only a mirage. The agreement signed at TAM-

DA’s inception gave TFB a contractual right to repay-

ment. In actuality, however, repayment fell within

TAMDA/TFB management discretion. The complete

overlap in the boards of TFB and its affiliate precluded

any arms-length relationship — any realistic expectation

that a demand for payment would be made or legal

enforcement actions would be taken. TFS stipulated in

the trial court that it never took “formal collection

actions” against TAMDA despite TAMDA’s repeated

failures to meet the annual due dates. Record, Vol. I, p.

104. In addition, the advances were de facto subordinated

to TAMDA’s corporate debt. TAMDA failed to meet its

obligations to TFB while still meeting all of its obliga-

tions to other creditors.

TAMDA’s use of the advances also leads us to conclude

that they were not debt. TAMDA spent the advances on

basic operating costs such as rent, supplies, travel, etc.

While the advances were not used to obtain capital

assets, the organization wholly depended on the advan-

ces to begin functioning. Purchase of such “necessary

first assets” points us away from a finding of debt. Slap-

'* TAMDA had 600 members during the relevant period, each member

paying $5 in annual dues.

A-15

pey Drive Industrial Park, supra, 561 F.2d at 583.

A particularly important indicator in distinguishing

debt from capital contributions focuses on interest pay-

ments. As this court stated in Curry v. United States,

supra, 396 F.2d 634, “ a true lender is concerned with

interest.” In this case, the agreement under which TFB

advanced $114,118.13 did not call for payment of interest.

Even with respect to the interest-bearing $50,000 notes,

TAMDA never made a single interest payment. Failure

to insist on interest payments clearly demonstrates that

TFB was not concerned with interest income. Rather like

an equity holder, TFB cared more about the continued

operation and growth of TAMDA. See id.; Estate of

Mixon v. United States, supra, 464 F.2d at 409.

IV. CQNCLUSION

[3] Slappey Drive, supra, articulated the essential dif-

ference separating lenders and holders of an equity inter-

est: “shareholders place their money ‘at the risk of the

business’ while lenders seek a more reliable return.” 561

F.2d at 581, see also Midland Distributors, Inc. v. United

States, 481 F.2d 730, 733 (5th Cir. 1973); Dillin v. United

States, supra, 433 F.2d at 1103. Self-serving assertions

that payment was expected cannot be substituted for

some concrete demonstration of the actual existence of

such expectations. We have analyzed the laundry list of

objective factors relevant to whether the relationship at

issue was one of a debtor or creditor. We can find no

maimed creditor. The absence of fixed, realistic dates for

repayment, the failure to provide for meaningful

enforcement mechanisms, the dependence of TAMDA

upon its earnings to repay the advances, the de facto

subordination of the TFB debt to other debt, t he use of the

A-16

advances for initial operating expenses, and the lack of

emphasis on interest cut strongly against the notion that

the advances were debt. Analysis of these factors shows

us the true and unambiguous nature of TFB’s advances

to its affiliate. TFB hoped to profit by its relationship

with TAMDA and furnished the capital to keep it going.

No other scenario can be reeled out. The district court

erred in not finding that the advances were, as a matter of

law, contributions to capital.

The problem of distinguishing debt from capital con-

tributions has been with us and will likely remain with us

for a long time. Primary reliance upon subjective indica-

tions of intent is simply not an effective way of resolving

that problem. In aland of hard economic facts, we cannot

root important decisions in parties’ pious declarations of

intent. Awarding the government its rightful harvest, we

hold that TFB’s advances to TAMDA were not loans and

therefore were not deductible as bad debts. The ruling of

the district court is,

REVERSED.

A-17

APPENDIX 6

In the United States District Court

for the Western District of Texas

Waco Division

Texas Farm Bureau, Plaintiff

Vv.

United States of America, Defendant

Civil No. W-79-CA-120

FINAL JUDGMENT

The above-styled cause was tried before the Court anda

jury on March 15 and 16, 1982, and the jury returned its

verdicts as follows:

1. D» you find that the advances which Texas

Farm Bureau made to, or paid on behalf of, TAMDA

were in the nature of a loan or an investment?

Answer “Loan” or “Investment.”

Answer: “Loan”’.

If your answer to Question 1 was “Investment,”

do not answer the remaining questions. If your

answer to Question | was “Loan,” then answer

Question 2.

2. Do you find that, at the time Texas Farm Bur-

eau made the advances, there was a reasonable ex-

pectation that TAMDA would repay the advances?

Answer “Yes” or “No.”

Answer: “Yes”.

If your answer to Question 2 was “No,” do not

answer the remaining questions. If your answer to

Question 2 was “Yes,” then answer Question 3.

3. Do you find that the advances were bona fide

debts which became worthless, in whole or in part,

A-18

in the fiscal year of Texas Farm Bureau which ended

October 31, 1970?

Answer “Yes” or “No.”

Answer: “Yes’”’.

If your answer to Question 3 was “No,” do not

answer Question 4. If your answer to Question 3 was

“Yes,” then answer Question 4.

4. What percentage of the advances do you find

were bona fide debts which became worthless in the

fiscal year ending October 31, 1970?

Your answer should be a percentage from 0 to 100

percent.

Answer: 98%.

On the basis of the foregoing jury verdicts, it is

hereby ORDERED, ADJUDGED and DECREED as

follows:

1. That Texas Farm Bureau recover from the Uni-

ted States of America the sum of $14,801.82 as an

overpayment of federal income taxes and assessed

interest for its fiscal year ended October 31, 1967,

consisting of $11,673.74 tax and $3,128.04 assessed

interest;

2. That Texas Farm Bureau recover from the Unit-

ed States of America the additional sum of $5,418.77

as an overpayment of federal income taxes and

assessed interest for its fiscal year ended October 31,

1968, consisting of $3,904.13 tax and $1,514.64

assessed interest;

3. That Texas Farm Bureau recover from the

United States of America the additional sum of

$74,916.01 as an overpayment of federal income

taxes and assessed interest for its fiscal year ended

October 31, 1970, consisting of $59,083.95 tax and

$15,832.07 assessed interest;

4. That, in addition to the cumulative amount of

$95,136.60 awarded in paragraphs 1, 2 and 3 above,

A-19

Texas Farm Bureau recover interest from the United

States of America on the above cumulative amount

from the date of payment by Texas Farm Bureau,

with such interest to run at the annual rates estab-

lished under Section 6621 of the Internal Revenue

Code of 1954 (26 U.S.C.); and

5. That each party bear its own costs.

ENTERED THIS 8th day of April, 1982.

Lucius D. Bunton

AAR OoeA Sao ee Re Se a ee ee ee eee ee ee

Approved As to Form:

Johnny D. Mixon

POP eee COO eeC CC Cee Cee ee ee eee ee eee eee

JOHNNY D. MIXON

Attorney, Tax Division

Department of Justice

Room 5B31, 1100 Commerce Street

Dallas, Texas 75242

(214) 767-0293

ATTORNEY FOR UNITED STATES OF AMERICA

Peeler Williams, Jr.

PEELER WILLIAMS, JR.

Attorney at Law

3804 Castle

Waco, Texas 76710

ATTORNEY FOR TEXAS FARM BUREAU

A-20

APPENDIX C

In the

United States Court of Appeals

For the Fifth Circuit

No. 82-1355

D. C. Docket No. W-79-CA-120

Texas Farm Bureau, Plaintift-Appellee,

versus

United States of America, Defendant-Appellant.

Appeal from the United States District Court for the

Western District of Texas.

Before CLARK, Chief Judge, GOLDBERG and

POLITZ, Circuit Judges.

JUDGMENT

This cause came on to be heard on the record on appeal

and was argued by counsel;

ON CONSIDERATION WHEREOF, It is now here

ordered and adjudged by this Court that the judgment in

this cause be, and the same is hereby, reversed;

IT IS FURTHER ORDERED that the plaintiff-

appellee pay to the defendant-appellant the costs on

appeal, to be taxed by the Clerk of this Court.

February 21, 1984

ISSUED AS MANDATE: June 4, 1984

A-21

APPENDIX D

In the United States Court of Appeals

For the Fifth Circuit

No. 82-1355.

Texas Farm Bureau,

Plaintiff-Appellee

v.

United States of America,

Defendant-Appellant.

Appeal from the United States District Court

For the Western District of Texas

ON PETITION FOR REHEARING AND

SUGGESTION FOR REHEARING

EN BANC

(Opinion February 21, 1984, 5 Cir.,

1984, 725 F.2d 307)

Before CLARK, Chief Judge, GOLDBERG and

POLITZ, Circuit Judges.

PER CURIAM:

Appellee seeks rehearing on the basis that the Court’s

holding in this case, that the “debt versus contribution to

capital” issue presents primarily a question of law, con-

flicts with existing Fifth Circuit authority. While we do

not agree with this centention, we pause briefly to fit the

holding in this case more securely into the Circuit’s

jurisprudence.

Between the time this case was argued and the time

that the panel decided it, Saunders v. Commissioner of

Internal Revenue, 720 F.2d 871 (5th Cir. 1983) was

decided. Saunders involved funds distributed by an edu-

A-22

cational trust established by an employer-corporation for

the benefit of its employees’ children. In that case, the

Court affirmed a Tax Court finding that the funds dis-

tributed by te trust were taxable income to the corpora-

tion’s employee. Applying the “clearly erroneous” stan-

dard of,review, the Court stated that, “[w]hether a

certain transaction creates a creditor-debtor relationship

is a question of fact for the trier of fact,” and that,

‘{iJntent is the determinative factor.” Appellee argues

that Saunders is inconsistent with the panel’s holding in

this case. Our view of the two cases, however, suggests

otherwise.

[1,2] Although both cases pose the general question of

whether a debtor-creditor relationship has been created,

they arise from two different and discrete factual con-

texts. In the debt versus equity area, involving transac-

tions between a corporation and an entity with an inter-

est in that corporation, this Court has developed a set of

objective factors to aid courts in making the determina-

tion whether the particular transaction creates debt.

Slappey Drive Ind. Park v. U.S., 561 F.2d 572, 582 (5th

Cir. 1977); Estate of Mixon v. United States, 464 F.2d 394,

402 (5th Cir. 1972); Montclair, Inc. v. Commissioner of

Internal Revenue, 318 F.2d 38 (5th Cir. 1963). Further-

more, decisions of this Court establish beyond peradven-

ture that in the Fifth Circuit debt-equity determination is

ordinarily a question of law to be decided by the court.

Slappey Drive Ind. Park, supra, 561 F.2d at 582, n. 17;

Estate of Mixon, supra, 464 F.2d at 402; Tyler v. Tomiin-

son. 414 F.2d 844, 850 (5th Cir. 1969). Although in some

situations intent may play an important role in debt-

equity determinations, Estate of Mixon, supra, 464 F.2d

A-23

at 407, courts look to intent only when other relevant,

objective factors regarding the transaction fail to clearly

indicate either debt or equity. Id.; Tyler v. Tomlinson,

supra, 414 F.2d 844.

[3] In deciding this case, we carefully analyzed the facts

surrounding the relevant transaction and concluded

that, despite certain differences, the transaction closely

resembled a transaction between a corporation and its

shareholder. We concluded that, consistent with the

general rule in the area of debt-equity, intent should not

be determinative. An analysis of the transaction’s rele-

vant, objective factors unambiguously indicated that

Texas Farm Bureau had made a contribution to capital to

its offspring corporation and not a loan. In Saunders on

the other hand, the Court made no such analogy be:ween

the transaction at issue and the debt-equity sicuation.

Tyler v. Tomlinson, supra, and its progeny were nowhere

mentioned; rather, intent was declared to be determina-

tive. Thus Fifth Circuit law, with respect to distinguish-

ing debt from compensation, is different from the law

with respect to distinguishing debt from contributions to

capital. However, the court’s choice in Saunders not to

place primary reliance upon a “legal evaluation” of objec-

tive factors, does not affect the long line of precedent in

the debt-equity area.

For the same reasons that Saunders is distinguishable,

we find that this case is not controlled by Byram v. Unit-

ed States, 705 F.2d 1418 (5th Cir. 1983). In that case, the

Court held that “the purpose for holding proverty ...is a

question of intent and motive” and “as such, it is a ques-

tion of pure fact.” Jd. at 1423. The facts in Bryam called

for distinghishing “capital assets” from assets held

A-24

“primarily for sale to customers in the ordinary course of

[the taxpayer’s] trade or business.”! This is a wholly

different task from the one in the case at bar. The very

words, “purpose for holding property” suggests that

intent and motive should be pivotal in making the neces-

sary determination. Conversely, there is nothing about

the task of distinguishing debt from equity that necessar-

ily calls for consideration of subjective belief. A party

could earnestly believe that a certain advance to a corpor-

ation fits the party’s individualized notion of “debt,” but

that notion might range far from a definition of debt

derived from business community norms or from the law.

Finally, in distinguishing this case from Saunders and

Byram, we pause to reaffirm our conviction that the hol-

dings of Tyler v. Tomlinson, supra, Estate of Mixon,

supra and Slappey Drive Ind. Park, supra, remain solidly

entrenched as law in this Circuit. Our high technology

age has yet to produce an accurate, dependable means for

determining a man’s subjective beliefs. At least until

such a development occurs, reliance on more objective

types of evidence is generally desirable. This Court has

chosen this latter path with respect to resolving debt

versus equity controversies. We need not under the facts

of this case, deviate from letter or logic of that precedent.

The Petition for Rehearing is DENIED, and no

member of this panel nor judge in regular active service

on the court having requested that the court be polled en

banc (Federal Rules of Appellate Procedure and Local

Rule 35), the Szggestion for Rehearing En Banc is

DENIED.

i 25 U.S.C. §1221.