The Internal Revenue Service found that Tribune Media Company’s subordinated debt was not bona fide debt and that its guarantees of the debt were not bona fide guarantees.
Opinion of the US Tax Court
The Tax Court ruled mostly in favour of the IRS and held that the subordinated “debt” should be considered equity for tax purposes. However, the court ruled in favour of Tribune Media Company with respect to the guarantees.
In determining the substance of the advances, the court considered 13 factors derived from the Dixie Dairies case (74 T.C. 476 (1980):
• Names given to the certificates evidencing the indebtedness
• Presence or absence of a fixed maturity date
• Source of payments
• Right to enforce payments
• Participation in management as a result of the advances
• Status of the advances in relation to regular corporate creditors
• Intent of the parties
• Identity of interest between creditor and stockholder
• “Thinness” of capital structure in relation to debt
• Ability of corporation to obtain credit from outside sources
• Use to which advances were put
• Failure of debtor to repay, and
• Risk involved in making advances
In particular, the court noted that there was no fixed maturity date and no meaningful right to enforce repayment of the debt. In addition, it appeared from the facts of the case that the parties intended the subordinated debt to be treated as equity.
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