89 T.C. 816">*817 By statutory notices of deficiency, respondent determined deficiencies in petitioners' income taxes for the taxable years as follows: 89 T.C. 816">*818

The issues for decision are (1) whether funds paid by petitioners to Presidential Airways Corp., a subchapter S corporation (hereinafter Presidential), at the time Presidential was established and from time to time thereafter, should be regarded as equity investments rather than loans for Federal income tax purposes; (2) if the payments are loans, whether petitioners recognized taxable income in 1977 and 1978 as a result of distributions they received in those years from Presidential; and (3) whether investment tax credits must be recaptured in full in 1977 and 1978, even though the use of the credits caused the imposition of an increased minimum tax in the years the investment tax credits were used.

GENERAL FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation and exhibits thereto are incorporated herein1987 U.S. Tax Ct. LEXIS 148">*152 by reference.

89 T.C. 816">*819 Petitioners Joseph M. and Doris G. Segel are husband and wife who resided in Merion, Pennsylvania, at the time they filed their petition. They filed joint Federal income tax returns for the taxable years 1972, 1974, 1975, 1977, and 1978.

Petitioner Joseph Segel holds a bachelor of science degree from the Wharton School of Business Administration of the University of Pennsylvania. His major was marketing. He also attended graduate business school at Wharton for 2 years, but did not receive a degree because he never wrote his thesis.

Petitioner Joseph Segel is an experienced, knowledgeable businessman and has been involved with several business ventures, one of which traded under the name "Franklin Mint." He founded Franklin Mint in 1964, was responsible for taking the company public shortly thereafter, and retired from his position as chairman of the board in 1973. After retiring from Franklin Mint, Joseph Segel was involved primarily in public service work with the United Nations as Chairman of the Board of Governors of the United Nations Association of the United States and as a Presidential appointee to the U.S. delegation to the United Nations General1987 U.S. Tax Ct. LEXIS 148">*153 Assembly.

Petitioner Alan J. Segel resided in Merion, Pennsylvania, at the time he filed his petition. Petitioner Alan Segel is the son of petitioners Joseph and Doris Segel.

Petitioners Marvin L. and Rhonda P. Segel were husband and wife who resided in Cherry Hill, New Jersey, at the time they filed their petition. They filed joint Federal income tax returns for 1977 and 1978. Petitioner Marvin Segel filed Federal income tax returns as a single individual for the years 1972, 1974, and 1975. Petitioner Marvin Segel is the son of petitioner Joseph Segel.

Petitioner Fannie B. Segel resided in PhiladelphiaPennsylvania, at the time she filed her petition. Petitioner Fannie Segel is the mother of petitioner Joseph Segel.

Petitioners Michael D. and Sandy Stern are husband and wife who resided in Wynnewood, Pennsylvania, at the time they filed their petition. They filed a joint Federal income tax return for 1978. Petitioner Sandy Stern is the daughter 89 T.C. 816">*820 of petitioner Doris Segel and the stepdaughter of petitioner Joseph Segel.

Respondent issued a statutory notice of deficiency to each of the petitioners setting forth determined deficiencies in income tax liability for the1987 U.S. Tax Ct. LEXIS 148">*154 years and in the amounts shown above.

Presidential was organized under the laws of Pennsylvania on or about September 2, 1975. It was established to operate a new charter aircraft service to serve the eastern seaboard.

On or about September 11, 1975, the following individuals (hereinafter the shareholders) acquired the following interests in Presidential: Joseph Segel, 15 shares, or 30 percent; Doris Segel, 15 shares, or 30 percent; Marvin Segel, 10 shares, or 20 percent; Sandy Stern, 4 shares or 8 percent; Joseph Segel, custodian for Alan Segel, 4 shares, or 8 percent; and Fannie Segel, 2 shares, or 4 percent.

Petitioner Joseph Segel was chairman of the board and president of Presidential from its inception in September of 1975 until petitioners later sold all their interests in Presidential.

On or about September 11, 1975, Presidential filed a valid election to be treated as a small business corporation under subchapter S of the Internal Revenue Code. ⁴

1987 U.S. Tax Ct. LEXIS 148">*155 On or about September 18, 1975, the following petitioners ⁵ made the following payments to acquire their respective stock interests in Presidential (hereinafter referred to as the initial capitalization):

89 T.C. 816">*821 Also on or about September 18, 1975, the shareholders made additional transfers of funds to Presidential in the aggregate amount of $ 2,035,000 in direct proportion to their stock interests. The shareholders made further transfers of funds to Presidential in proportion to their stockholdings in the following aggregate amounts:

1987 U.S. Tax Ct. LEXIS 148">*156 (The foregoing transfers of funds to Presidential in excess of the initial capitalization are hereinafter referred to as the payments.)

There was no written agreement between Presidential and the shareholders to evidence Presidential's intent to repay the payments, or to evidence any expectation of the shareholders that Presidential would repay the payments in any fixed manner or at any fixed date.

The shareholders received no security for the payments.

Presidential never paid interest to the shareholders with respect to the payments.

Presidential filed a Small Business Corporation Income Tax Return, Form 1120S, for the period September 11, 1975, through December 31, 1975, and for calendar year periods 1976, 1977, and 1978. All four returns showed a loss for Presidential. Presidential's losses for such years were allocated to the shareholders and reported on the shareholders' individual income tax returns in accordance with their ownership interests in Presidential. Presidential's losses were as follows:

1987 U.S. Tax Ct. LEXIS 148">*157 Eventually the shareholders of Presidential decided to sell some of Presidential's assets. Presidential distributed a portion of the sales proceeds to the shareholders in proportion 89 T.C. 816">*822 to their interests in Presidential. Presidential distributed $ 2,305,359 to the shareholders in 1977, and $ 961,000 in 1978.

From September 11, 1975, through December 31, 1978, the shareholders' transfers to Presidential totaled $ 8,211,000 in the aggregate ($ 7,011,000 of payments plus the $ 1,200,000 initial capitalization), and the distributions from Presidential totaled $ 3,266,359 in the aggregate. The shareholders reported on their individual income tax returns aggregate losses from Presidential of $ 4,117,702.

For convenience, our remaining findings of fact and opinion will be grouped together by the issues to which they relate.

ADDITIONAL FINDINGS OF FACT

The income tax returns of Presidential were prepared by Merves & Co., certified public accountants. Petitioners' individual income tax returns for the years at issue were prepared by Merves & Co. or by Merves, Grossman, Brenner & Co., a predecessor firm to Merves & Co. Stanley Merves, a senior member of Merves 1987 U.S. Tax Ct. LEXIS 148">*158 & Co., has known petitioner Joseph Segel for about 45 years. Mr. Merves was also assistant treasurer of Presidential during the years at issue.

Presidential's Federal income tax returns for 1975 through 1978 listed "Capital Stock and Capital Surplus" in the amount of the initial capitalization (i.e., $ 1,200,000) on each respective Schedule L (balance sheets). The amount shown on each respective Schedule L as "Loans from Shareholders" was the total of the payments, less the distributions to the shareholders. Presidential's income tax returns were all signed by petitioner Joseph Segel, as president, and by Merves & Co., as preparer.

The payments were treated similarly on "Capital Stock/Franchise-Loans-Corporate Net Income Tax Report" filings with the Commonwealth of Pennsylvania for 1975, 1976, 1977, and 1978. Those returns also were signed by Joseph Segel, as Presidential president, and by Merves & Co., as preparer.

89 T.C. 816">*823 Presidential's general ledger also accounted for the payments in accounts titled "Loans from Shareholders." The distributions to the shareholders of $ 3,266,359 in 1977 and 1978 were debited to and decreased the "Loans from Shareholders" general ledger account.

1987 U.S. Tax Ct. LEXIS 148">*159 No audited financial statements were prepared for Presidential for any of the years at issue. Merves & Co., or its predecessor, however, did prepare unaudited balance sheets. The balance sheets treated the payments inconsistently from year to year. The balance sheets characterized the initial capitalization and the payments (net of the distributions to the shareholders) as follows:

In connection with a proposed sale of the stock of Presidential, the shareholders unanimously adopted the following resolution dated October 1, 1979:

We, the undersigned, being all of the shareholders of PRESIDENTIAL AIRWAYS CORPORATION, a Pennsylvania Corporation, do hereby consent in writing to the action taken in the following resolution:

Whereas, PRESIDENTIAL AIRWAYS CORPORATION, was organized on September 2, 1975 with a stated capital of $ 5,000.00 and paid in surplus of $ 1,195,000.00;

Whereas, the Shareholders of this Corporation have made loans to the Corporation, from time to time;

1987 U.S. Tax Ct. LEXIS 148">*160 Whereas, said loans to the Corporation to date total $ 3,900,140.57;

Whereas, said loans are reflected on the books of the Corporation as debt obligation to the shareholders;

Whereas, the shareholders of this Corporation are desirous of contributing said loans to paid-in surplus;

Now, Therefore, be it Resolved, that the shareholders of this Corporation do hereby contribute those various loans made to the Corporation from time to time in the amount of $ 3,900,140.57 to the paid-in surplus of said Corporation, and further direct that all necessary action be taken in order to effectuate such contributions on the books of the Corporation. ⁷

89 T.C. 816">*824 The board of directors also unanimously passed a resolution that consented to the shareholders' resolution. Adjusting entries were made by Merves & Co. at that time to reflect the conversion of the "loans" to equity1987 U.S. Tax Ct. LEXIS 148">*161 pursuant to the corporate resolutions.

On November 9, 1979, the shareholders entered into an agreement for the sale of their Presidential stock to Eric E. Glass for $ 240,000. The agreement and sales price took into account that certain assets of Presidential, which Mr. Glass did not wish to purchase, would be distributed to the shareholders. Adjusting journal entries were made by Merves & Co. shortly thereafter to reflect the withdrawal of those assets. The sale to Mr. Glass was consummated on November 30, 1979.

OPINION

The first issue for our determination is whether the distributions are taxable to the shareholders. Respondent contends that even though there was no formal evidence of indebtedness, the payments constituted "loans" (as characterized by respondent) that were maintained on an open account basis.

Respondent bases his assertion on the fact that the payments were denominated as loans in filings with the Federal and State taxing authorities, in the corporation's books of account, in the corporate resolutions, and in some of the balance sheets prepared by Merves & Co. to reflect Presidential's financial position. Once Presidential's losses exceeded the initial capitalization, 1987 U.S. Tax Ct. LEXIS 148">*162 respondent argues that subsequent Presidential losses reduced the shareholders' bases in the loans. Presidential's cumulative losses surpassed $ 1,200,000 during 1976; thus, respondent asserts, petitioners were required to decrease their bases in the loans from 1976 onward. When repayments of the loans were made to the shareholders in 1977 and 1978, respondent asserts that the shareholders' respective bases in the loans were less than the face amounts of the loans because the Presidential losses should have been applied to decrease the shareholders' respective bases in the loans for tax purposes, but would not have decreased the face amounts of the loans actually owed by Presidential to the shareholders. As such, 89 T.C. 816">*825 under Darby Investment Corp. v. Commissioner, 37 T.C. 839">37 T.C. 839 (1962), affd. per curiam 315 F.2d 551">315 F.2d 551 (6th Cir. 1963), the shareholders received taxable income upon the repayment to them of loans where their bases in the loans were less than the face amounts of the loans. According to respondent, the portion of the repayments constituting income to each shareholder is a fraction, the numerator of which is the1987 U.S. Tax Ct. LEXIS 148">*163 difference between the face amount of the loan and the respective shareholder's basis in the loan, and the denominator of which is the face amount of the loan. ⁸

Respondent concedes that if the loans had been represented by formal evidence of indebtedness, the income received upon retirement of the loans would be considered as having been received in exchange for a capital asset pursuant to section 1232. ⁹ Respondent asserts, however, that because no evidence of indebtedness is present in the instant case, the income received upon repayment of the loans is ordinary in character.

1987 U.S. Tax Ct. LEXIS 148">*164 Petitioners argue that all the payments must be considered equity and not debt; therefore, no income is recognized by the shareholders upon distributions to them because their bases in their Presidential stock were never reduced below zero. ¹⁰ If the payments must be characterized as debt, petitioners argue in the alternative that the distributions nevertheless do not constitute taxable income because (i) Presidential's obligation was speculative and repayment to the shareholders was in doubt; (ii) the economic reality of the investment is that the shareholders never realized any income from their investment in Presidential; or (iii) the policy behind subchapter S precludes the application of normal debt repayment rules to corporations electing to be 89 T.C. 816">*826 taxed under the provisions of subchapter S where no arm's-length debtor-creditor relationship exists between the shareholders and the corporation. Petitioners' final contention is that if the payments must be characterized as debt and must be recognized as taxable income, the character of the income should be capital gain, not ordinary income, because it arose from the same "open transaction" that culminated in the sale of1987 U.S. Tax Ct. LEXIS 148">*165 the shareholders' stock in 1979.

We first must determine whether the payments constitute debt or equity for Federal tax purposes. This is an often-litigated issue; however, the usual roles are reversed -- respondent herein argues for debt classification. This different1987 U.S. Tax Ct. LEXIS 148">*166 twist to the usual fact pattern, however, does not require us to apply different legal principles. See Ragland Investment Co. v. Commissioner, 52 T.C. 867">52 T.C. 867, 52 T.C. 867">875 (1969) (Court-reviewed), affd. per curiam 435 F.2d 118">435 F.2d 118 (6th Cir. 1970). ¹¹

Unfortunately, there is no singular defined set of standards that has been uniformly applied in the debt-equity area. In the Tax Reform Act of 1969, Pub. L. 91-172, 83 Stat. 487, 613, sec. 415(a), Congress enacted section 385 ¹²1987 U.S. Tax Ct. LEXIS 148">*168 as an attempt to pass to respondent the task of establishing uniform rules to define debt and equity. Section 385 authorizes respondent, as the delegate of the Secretary of Treasury, to prescribe regulations to define corporate stock and1987 U.S. Tax Ct. LEXIS 148">*167 debt for all purposes of the Code and lists five factors 89 T.C. 816">*827 that may (but need not) be considered in the regulations. ¹³ Final regulations for section 385 were issued in December of 1980, T.D. 7747, 1981-1 C.B. 141, but with a delayed effective date that subsequently was extended several times. Effective August 5, 1983, however, the section 385 regulations were withdrawn (T.D. 7920, 1983-2 C.B. 69), thus leaving only case law to guide our inquiry into the debt-equity issue. ¹⁴

In Georgia-Pacific Corp. v. Commissioner, 63 T.C. 790">63 T.C. 790, 63 T.C. 790">796 (1975), this Court indicated that each debt-equity case must be decided on its own facts and that there are so many combinations of factual circumstances that precedents in these factual cases are generally of little value. We must look to such cases, however, to determine which factors to consider and weigh in making our factual determination in the instant case.

In Dixie Dairies Corp. v. Commissioner, 74 T.C. 476">74 T.C. 476, 74 T.C. 476">493 (1980), we cited several cases in which courts have identified and considered various1987 U.S. Tax Ct. LEXIS 148">*169 factors in resolving similar questions of debt versus equity: Estate of Mixon v. United States, 464 F.2d 394">464 F.2d 394, 464 F.2d 394">402 (5th Cir. 1972) (13 factors); A.R. Lantz Co. v. United States, 424 F.2d 1330">424 F.2d 1330, 424 F.2d 1330">1333 (9th Cir. 1970) (11 factors); Fin Hay Realty Co. v. United States, 398 F.2d 694">398 F.2d 694, 398 F.2d 694">696 (3d Cir. 1968) (hereinafter cited as Fin Hay) (16 factors); and 63 T.C. 790">Georgia-Pacific Corp. v. Commissioner, supra at 796-799 (13 factors).

Appeals for all petitioners in the instant case would lie with the Court of Appeals for the Third Circuit, so we shall look to the approach taken by that court in 398 F.2d 694">Fin Hay, supra.¹⁵ See Golsen v. Commissioner, 54 T.C. 742">54 T.C. 742 (1970), affd. 445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940">404 U.S. 940 (1971). The court in Fin Hay noted that there were 89 T.C. 816">*828 several criteria by which to judge the true nature of an investment in a corporation:

(1) the intent of the parties; (2) the identity between creditors and shareholders; (3) the1987 U.S. Tax Ct. LEXIS 148">*170 extent of participation in management by the holder of the instrument; (4) the ability of the corporation to obtain funds from outside sources; (5) the "thinness" of the capital structure in relation to debt; (6) the risk involved; (7) the formal indicia of the arrangement; (8) the relative position of the obligees as to other creditors regarding the payment of interest and principal; (9) the voting power of the holder of the instrument; (10) the provision of a fixed rate of interest; (11) a contingency on the obligation to repay; (12) the source of the interest payments; (13) the presence or absence of a fixed maturity date; (14) a provision for redemption by the corporation; (15) a provision for redemption at the option of the holder; and (16) the timing of the advance with reference to the organization of the corporation. [398 F.2d 694">398 F.2d at 696; fn. ref. omitted.]

1987 U.S. Tax Ct. LEXIS 148">*171 The court cautioned, however, that:

neither any single criterion nor any series of criteria can provide a conclusive answer in the kaleidoscopic circumstances which individual cases present. See John Kelley Co. v. Commissioner of Internal Revenue, 326 U.S. 521">326 U.S. 521, 326 U.S. 521">530, 66 S. Ct. 299, 90 L. Ed. 278 (1946).

The various factors which have been identified in the cases are only aids in answering the ultimate question whether the investment, analyzed in terms of its economic reality, constitutes risk capital entirely subject to the fortunes of the corporate venture or represents a strict debtor-creditor relationship. Since there is often an element of risk in a loan, just as there is an element of risk in an equity interest, the conflicting elements do not end at a clear line in all cases.

[398 F.2d 694">398 F.2d at 697; fn. ref. omitted.]

Thus, the ultimate issue under Fin Hay is measurement of the transactions by objective tests of economic reality, and the touchstone of economic reality is whether an outside lender would have made the payments in the same form and on the same terms. Scriptomatic, Inc. v. United States, 555 F.2d 364">555 F.2d 364, 555 F.2d 364">367 (3d Cir. 1977).1987 U.S. Tax Ct. LEXIS 148">*172 If the shareholders' payments were far more speculative than what an outsider would make, the payments would be loans in name only. Fin Hay, 398 F.2d 694">398 F.2d at 697.

We find that the payments to Presidential were placed at the risk of the business as an economic reality and that they were not made on the same terms as would be required by an outside lender. The economic realities require that the 89 T.C. 816">*829 payments be characterized as capital contributions for Federal tax purposes.

Before moving to our analysis of the objective tests under Fin Hay, however, we note that respondent's argument apparently is based on the assumption that, in form, the payments to Presidential were loans. Respondent suggests that the form of the transaction and the shareholders' intent ¹⁶ that the payments be loans are shown by the way the various records and documents characterize the advances; in fact, this seems to be the extent of respondent's argument on the debt-equity issue. As noted above, respondent's position that the payments are loans appears to be based only on the fact that the payments were denominated as loans in the various corporate documents and filings. 1987 U.S. Tax Ct. LEXIS 148">*173

We, however, do not find that the payments in form were loans. We base such a finding on the inconsistent treatment of the payments in the balance sheets, and, more importantly, on the lack of any written agreement between Presidential and the shareholders to evidence the form of the payments.

Petitioner Joseph Segel was the main force behind Presidential and made the decisions for all his family members in 1987 U.S. Tax Ct. LEXIS 148">*174 regard to their investments in Presidential. Joseph Segel and Stanley Merves testified regarding the intent of Presidential and the shareholders, specifically Joseph Segel's intent. In brief, their testimony was that Joseph Segel was not particularly concerned with the financial or legal classification of the payments. Rather, Joseph Segel valued his reputation in the business community, and did not want to be associated with a company that had a negative net worth or that might cause a creditor to lose money from dealing with it. Although the witnesses were very credible, we do not rely on that testimony in making our findings in this case; instead, we rely on an analysis under the 89 T.C. 816">*830 objective tests enunuciated in Fin Hay and Scriptomatic, Inc. ¹⁷

1987 U.S. Tax Ct. LEXIS 148">*175 Our first objective factor, and the second factor in Fin Hay, is the identity between shareholders and the putative creditors. In the instant case, the payments were exactly proportional, i.e., they were made by the shareholders in exact proportion to their percentage of stock ownership of the company. Such a situation gives rise to a strong inference that the payments represent additional capital investment and not loans. Arlington Park Jockey Club v. Sauber, 262 F.2d 902">262 F.2d 902, 262 F.2d 902">906 (7th Cir. 1959). See also Nelson v. Commissioner, 19 T.C. 575">19 T.C. 575, 19 T.C. 575">580 (1952) (listing several cases that stressed the equal proportionality between payments and stockholdings and that found the payments constituted contributions to capital, not loans).

The sixth factor in Fin Hay concerns the risk involved in making the payments to the corporation. The more the payments are at the risk of and subject to the vagaries of the business, the more they are indicative of equity.

The payments were made for the purpose of financing the development of an airline, which, it was hoped, might be such that the airline could be operated successfully in1987 U.S. Tax Ct. LEXIS 148">*176 a competitive market. During the time of the payments, Presidential incurred heavy losses; in fact, the payments apparently were used to carry on the day-to-day operations of the business. At the times of the payments, it could not be projected that the payments could be repaid out of expendable assets or soundly anticipated cash-flow. There could have been no reasonably anticipated source out of which any repayments could have been made within a reasonably foreseeable time. Rather, such repayment could only be assured if the theretofore unsuccessful business of Presidential turned around and began generating profits. 89 T.C. 816">*831 Putative "loans" such as these, made to a business which had not demonstrated a capacity for making a profit, and for such basic needs as day-to-day working capital, are, by their very nature, placed at risk of the business. See Gustin v. Commissioner, 412 F.2d 803">412 F.2d 803, 412 F.2d 803">804 (6th Cir. 1969), affg. a Memorandum Opinion of this Court. ¹⁸

1987 U.S. Tax Ct. LEXIS 148">*177 The distributions made in 1977 and 1978 only bolster this analysis. They were not made out of cash-flow or expendable assets; rather, they were made out of proceeds from sales of Presidential's major operating assets -- the aircraft. In fact, Joseph Segel testified that the distributions of proceeds to shareholders were distributions from sales of aircraft as the business was "winding down."

Presidential's balance sheets and Federal tax returns bear out Mr. Segel's statement. The end of year balance sheets for Presidential list as assets aircraft having original costs as follow:

The 1975 tax return claimed investment credits (for "pass through" to the shareholders) for "seven year property" with a basis of $ 5,066,298 -- the same value as given for the cost of aircraft on the 1975 balance sheet. The 1977 and 1978 tax returns show recapture of investment credits for aircraft placed into service in December of 1975 in the aggregate amounts of $ 3,168,562 and $ 1,063,711, ¹⁹ respectively. Thus, of the aircraft owned by Presidential at the end of 1976, approximately 80 percent (when measured by1987 U.S. Tax Ct. LEXIS 148">*178 89 T.C. 816">*832 the original cost of the aircraft) were sold or otherwise disposed of by June 1978. ²⁰

1987 U.S. Tax Ct. LEXIS 148">*179 The aircraft were essential for Presidential to keep its charter aircraft company in business. The disposition of the aircraft only shrank the capacity of Presidential to provide services to customers. By no means could it be said that the distributions to the shareholders were attributable to the sale of Presidential's expendable assets. Rather, the distributions to the shareholders could be made by Presidential only because it was liquidating the bulk of its core assets, not because Presidential was generating income and profits from its operations. In short, as noted above, it is clear that, at the time the payments were made, any return of the payments was extremely speculative and the payments thus constituted risk capital. See Diamond Brothers Co. v. Commissioner, 322 F.2d 725">322 F.2d 725, 322 F.2d 725">732 (3d Cir. 1963), affg. a Memorandum Opinion of this Court.

Most important to our ruling in this case, and key to an analysis under Fin Hay, however, is the independent creditor test. This is similar to the fourth factor in Fin Hay -- the ability of the corporation to obtain funds from outside sources. The focus of the court in Fin Hay, however, is not1987 U.S. Tax Ct. LEXIS 148">*180 simply on the ability of a corporation to obtain the funds from outside sources; rather, the focus is whether an outside lender would have lent the funds on the same or similar terms. Scriptomatic, Inc. v. United States555 F.2d 364">555 F.2d at 368; Fin Hay, 398 F.2d 694">398 F.2d at 697. We do not doubt that an outside lender could have been found to finance Presidential's incorporation and operations; Joseph Segel's experience and track record were impressive and likely would have been sufficient to convince a lender to finance Presidential. What we cannot believe, however, is that a disinterested outside lender would have lent the money to Presidential in a debtor-creditor relationship on the same, or anywhere near the same, terms as did the shareholders.

89 T.C. 816">*833 Will Rogers is attributed with saying that it was not the return on his investment that he was concerned with * * * it was the return of his investment that mattered. In the real world, however, "a true lender is concerned with interest." Curry v. United States, 396 F.2d 630">396 F.2d 630, 396 F.2d 630">634 (5th Cir. 1968), cert. denied 393 U.S. 967">393 U.S. 967 (1968).1987 U.S. Tax Ct. LEXIS 148">*181 No interest was ever paid to the shareholders by Presidential, nor was there any contemplated during the period when the payments were outstanding. The 10th factor set forth in Fin Hay refers to the provision of a fixed rate of interest. Here there was no interest provision whatsoever, much less one that was fixed or determinable. If a lender does not insist upon interest payments, he is, therefore, interested in the future earnings of the corporation or their increased market value. Stinnett's Pontiac Service v. Commissioner, 730 F.2d 634">730 F.2d 634, 730 F.2d 634">640 (11th Cir. 1984), affg. a Memorandum Opinion of this Court; 396 F.2d 630">Curry v. United States, supra.Such a disinterest in interest points to a "contribution to capital conclusion." 396 F.2d 630">Curry v. United States, supra at 634.

We also note that (1) there were no written agreements between the shareholders and Presidential to evidence any indebtedness; (2) the shareholders received no security interest to secure repayment of the payments (beyond what they already possessed as stockholders); and (3) there was no fixed time or schedule for repayment of the payments1987 U.S. Tax Ct. LEXIS 148">*182 (7th, 8th, and 13th factors in Fin Hay). Those factors also are indicative of an equity contribution, rather than a debtor-creditor relationship.

More importantly to our inquiry under Fin Hay, however, these particulars do not comport with what we believe an outside lender would require. In Scriptomatic, Inc. v. United States, 555 F.2d 364">555 F.2d at 368, the Third Circuit noted that the crucial issue is what the market would accept as debt. We believe that an outside lender, at the outset, would require some formal indicia of the understanding by which the funds are advanced; even if the payments were on open account, a prudent businessperson would require a written agreement to that effect to protect such an investment. Additionally, we believe that an outside lender would require interest for use of the funds and some time or 89 T.C. 816">*834 schedule for repayment, if not some security for the debt as well.

A rose is a rose is a rose is a rose. ²¹ Similarly, equity is equity is equity, regardless of what appellation an investor might use in describing it. A use of words does not change the nature of things. Marye v. Parsons, 114 U.S. 325">114 U.S. 325, 114 U.S. 325">337 (1885)1987 U.S. Tax Ct. LEXIS 148">*183 (Bradley, J., dissenting). We find that, regardless of how they were reported on the various balance sheets, the payments were made on a basis far more speculative than that which an outside lender would require. ²²

Pursuant to Fin Hay, we hold that the payments constituted equity capital and not bona fide loans, and, thus, the distributions are nontaxable returns of capital to petitioners. In that we find for petitioners on this issue, we need 1987 U.S. Tax Ct. LEXIS 148">*184 not consider their other contentions regarding the nonincludability in income of the repayments from Presidential.

ADDITIONAL FINDINGS OF FACT

Presidential placed into service section 38 property for which investment tax credits (hereinafter ITC or ITC's) were available and taken during the period that the Segel family owned the company. Certain of the assets for which ITC's were taken ceased to be section 38 property in 1977 and 1978.

Petitioners filed timely Applications for Tentative Refund (Forms 1045) with respondent as a result of carrybacks of either unused ITC's or net operating loss deductions for the years shown below: ²³

89 T.C. 816">*835 Respondent originally allowed the tentative refunds as they were filed. The ITC's and net operating losses reported by petitioners were due largely to ITC's and corporate losses generated by Presidential and passed through to petitioners. 1987 U.S. Tax Ct. LEXIS 148">*185

After petitioners' last refund filing with respect to each of the years at issue, their tax returns reported the following items and amounts:

Except for Fannie Segel, none of the petitioners reported any ITC recapture for 1978.

In the notices of deficiency, respondent determined that petitioners' minimum tax, ITC, and ITC recapture should be as follows:

1987 U.S. Tax Ct. LEXIS 148">*187 89 T.C. 816">*836 The only items of tax preference reported by petitioners Alan, Marvin, and Fannie Segel were long-term capital gains. Petitioners Joseph and Doris Segel reported items of tax preference as follows:

Respondent does not contest the items of tax preference as reported by petitioners.

OPINION

We are asked to decide whether petitioners are entitled to any relief from the requirement of section 47 that petitioners must recapture the full amount of excess ITC upon the 89 T.C. 816">*837 early disposition of section 38 property where the ITC caused an increase in minimum tax in the year the ITC was taken. No testimony was given regarding this issue.

Respondent asserts that petitioners must report in 1977 and 1978, as a result of the disposition of section 38 property by Presidential, additional tax from the recapture of ITC's originally generated by Presidential in 1975, 1976, and 1977. Respondent contends that petitioners must recapture under section 47(a)²⁵1987 U.S. Tax Ct. LEXIS 148">*189 the full amount of the credits because petitioners were1987 U.S. Tax Ct. LEXIS 148">*188 entitled to their full share of the credits in the years that Presidential placed the section 38 property into service. ²⁶

Petitioners advance two arguments in the alternative regarding this issue. First, petitioners posit that they must recapture previously claimed ITC's only to the extent that they received a tax benefit from the ITC's that actually reduced their tax liabilities. Even though the ITC's seem to have fully reduced petitioners' tax liabilities, petitioners assert that they did not receive the full benefit of the ITC's because they also were liable for minimum tax in years to which the credits were carried back. For example, ²⁷ according to petitioners' brief, consider a taxpayer who had 89 T.C. 816">*838 regular tax imposed ²⁸ of $ 830 and ITC's available1987 U.S. Tax Ct. LEXIS 148">*190 in the amount of $ 230. If that taxpayer were liable for $ 100 of minimum tax, his total tax liability would be $ 700 (830 - 230 + 100). Since that is a decrease of only $ 130 (830 - 700) from his "regular tax imposed," the taxpayer, according to petitioner, has received the benefit of only $ 130 of the ITC's and should recapture only the $ 130 of the ITC's for which he has received a tax benefit.

Petitioners' second argument is best demonstrated by another numerical example that exemplifies the true interplay between ITC and the minimum tax during1987 U.S. Tax Ct. LEXIS 148">*191 the years at issue. Under section 56, ²⁹1987 U.S. Tax Ct. LEXIS 148">*192 as in effect during 1972 through 1975 (the years for which petitioners were liable for minimum tax according to the notices of deficiency), minimum tax was in addition to any other tax owed by a taxpayer, and the amount of minimum tax was calculated by applying a rate of 10 percent to the minimum tax base. The minimum tax base was computed as follows: ³⁰89 T.C. 816">*839

Assuming a taxpayer had $ 100,000 of tax preference items and "regular tax imposed" of $ 25,000, the difference in his "net tax liability," with and without ITC's of $ 20,000, is shown by the following computation:

Thus, even though ITC's of $ 20,000 were available, the taxpayer would have a reduction of only $ 18,000 (29,500 - 11,500) in his net tax liability. The difference is equal to 10 percent of the ITC's taken, and occurs because the "minimum tax base" is increased when ITC's are taken by the taxpayers. In short, for a taxpayer who is otherwise subject to the minimum tax, $ 100 of ITC will generate a decrease in net tax liability of only $ 90 because of the concomitant increase in the minimum tax. Thus, petitioners argue that they1987 U.S. Tax Ct. LEXIS 148">*193 either (1) are entitled to a refund of or decrease in their minimum tax for the years at issue; or (2) are required to recapture ITC's only in the amount of their "tax benefit," i.e., 90 percent of the ITC's available to and taken by them.

With regard to petitioners' first argument, their brief states, "As is clear * * *, the benefit of all the credits claimed by petitioners was not realized due to the imposition of a minimum tax. * * * the petitioners' minimum tax liability reduced or eliminated the benefit of some or all of the credits originally claimed." It is not at all clear why petitioners believe they did not receive any benefit from the ITC's that they claimed. ³¹ While the operation of section 5689 T.C. 816">*840 indirectly reduced that benefit, the ITC's petitioners claimed fully reduced their tax liability. If the taxpayer in the first example had not taken ITC, his tax liability would be the regular tax imposed of $ 830 plus minimum tax of $ 77 ($ 100 - (ITC of $ 230 multiplied by 10%)), for a total of $ 907. In the example, the taxpayer only owed $ 700 of taxes. That taxpayer most certainly received a benefit from the ITC's in the amount of $ 207 (907 - 700) by use of1987 U.S. Tax Ct. LEXIS 148">*194 the ITC's. It is only to the extent of the 10-percent increase in his minimum tax that the taxpayer has a plausible argument that he has received "no" benefit. That 10-percent increase, however, is the gravamen of petitioners' second argument. In short, we find petitioners' first argument wholly without merit because they received the benefit of the ITC's to the extent their total taxes were reduced by 90 percent of the ITC's taken by them.

1987 U.S. Tax Ct. LEXIS 148">*195 In regard to petitioners' second argument, there is no language in the Code or legislative history that specifically allows such a reduction in either ITC recapture or the minimum tax for the years at issue. Based upon our interpretation below of sections 47 and 56, we apply those sections as written, and we sustain respondent's determinations with regard to ITC recapture.

Respondent's brief, in appendices 1 through 7, specifies values of section 38 property disposed of by Presidential in 1977 and 1978, and the amounts of ITC taken thereon by 89 T.C. 816">*841 petitioners. Appendices 1 through 7 appear to comport with the tax returns in evidence and with the notices of deficiency issued by respondent. ³²1987 U.S. Tax Ct. LEXIS 148">*196 According to these documents, petitioners have paid ITC recapture on most of the 1977 dispositions, but, with the exception of Fannie Segel, on none of the 1978 dispositions. Respondent asserts that petitioners are liable for recapture of all ITC taken on the section 38 property disposed of in 1977 and 1978, except for furniture and fixtures placed in service in 1975 and disposed of in 1978. ³³

Petitioners' second argument contains three alternatives, all of which are permutations of the tax benefit rule. The tax benefit rule is a judicially developed principle that "allays some of the inflexibilities of the annual accounting system." Hillsboro National Bank v. Commissioner, 460 U.S. 370">460 U.S. 370, 460 U.S. 370">378 (1983) (hereinafter Hillsboro). ³⁴ Even though the rule originated in the Courts, it has the implicit approval of Congress, which has enacted section 111 as a general limitation of the rule. 460 U.S. 370">Hillsboro, supra at 378 n. 8. Sections 58(h) and 47(a) provide other codifications of the tax benefit rule for specific circumstances.

1987 U.S. Tax Ct. LEXIS 148">*197 In regard to our construction and interpretation of these provisions, there is no more persuasive evidence of the purpose of a statute than the words by which the legislature undertook to give expression to its wishes; where these words are sufficient in and of themselves to determine the purpose of a statute, we should follow their plain meaning. United States v. American Trucking Association, 310 U.S. 534">310 U.S. 534, 310 U.S. 534">543 (1940); Estate of Leder v. Commissioner, 89 T.C. 235">89 T.C. 235 (1987). This Court requires unequivocal evidence of legislative purposes before we construe a statute so as to override the plain meaning of the words used therein. 89 T.C. 816">*842 89 T.C. 235">Estate of Leder v. Commissioner, supra;Huntsberry v. Commissioner, 83 T.C. 742">83 T.C. 742, 83 T.C. 742">747-748 (1984).

The law is well settled that tax deductions and credits are a matter of legislative grace and the burden of showing clearly the right to the claimed credits is on the taxpayer. Interstate Transit Lines v. Commissioner, 319 U.S. 590">319 U.S. 590, 319 U.S. 590">593 (1943); Hokanson v. Commissioner, 730 F.2d 1245">730 F.2d 1245, 730 F.2d 1245">1250 (9th Cir. 1984),1987 U.S. Tax Ct. LEXIS 148">*198 affg. a Memorandum Opinion of this Court; Rickard v. Commissioner, 88 T.C. 188">88 T.C. 188, 88 T.C. 188">196 (1987); Rule 142(a). Petitioners also bear the burden of proving that respondent's determinations regarding the amounts of recapture are not correct. Welch v. Helvering, 290 U.S. 111">290 U.S. 111 (1933); Rule 142(a).

We first consider section 111 which, as in effect during the years at issue (1972 through 1978), read as follows:

SEC. 111. RECOVERY OF BAD DEBTS, PRIOR TAXES, AND DELINQUENCY AMOUNTS

(a) General Rule. -- Gross income does not include income attributable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery exclusion with respect to such debt, tax, or amount.

(b) Definitions. -- For purposes of subsection (a) --

* * * *

(2) Prior tax. -- The term "prior tax" means a tax on account of which a deduction or credit was allowed for a prior taxable year.

* * * *

(4) Recovery exclusion. -- The term "recovery exclusion", with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in accordance with regulations prescribed by the1987 U.S. Tax Ct. LEXIS 148">*199 Secretary, of the deductions or credits allowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this subtitle * * * or corresponding provisions of prior income tax laws * * *, reduced by the amount excludable in previous taxable years with respect to such debt, tax, or amount under this section. ³⁵