In Uncategorized on 07/25/2016 at 16:03

Torgeir Mantor isn’t lucky with his notes. We ran into him back in 2014; see my blogpost “A Sour Note,” 9/3/14. Now he’s doing a reprise with American Metallurgical Coal Co. And Subsidiaries, 2016 T. C. Memo. 139, filed 7/25/16. AMC is mixing-and-matching with a Liberian outfit (Lausanne) and an AMC subsidiary (Heimdal).

They’re running a CA geothermal deal, and Torgeir was VP of AMC. But Heimdal had to restructure when the US-Netherlands Antilles treaty ran out. Plus, they needed to keep within the bounds of financing covenants with third-party lenders. And they needed to funnel the profits offshore without paying US withholding.

Wherefore much corporate wheeling-dealing followed, in aid of which Torgeir and crew signed up a US Big Four partner, but no formal opinion was issued, and some of the advice (like annual statements of ownership) didn’t get followed.

The funnel was (you guessed it) a note, for a sale of partnership units from one sub to another.

Judge Cohen looked at the note.

“For a promissory note to constitute bona fide indebtedness, there must be an unconditional legally enforceable obligation to pay the money.  Horn v. Commissioner, 90 T.C. 908, 938 (1988).  The ‘simple expedient of drawing up papers’ is not controlling for tax purposes when “the objective economic realties [sic] are to the contrary.”  Frank Lyon Co. v. United States, 435 U.S. 561, 573 (1978).” 2016 T. C. Memo. 139, at p. 22.

After a quick peek at twelve (count ‘em, twelve)  factors, none of which is dispositive and some of which are more equal than others, Judge Cohen strikes up facts and circumstances (Sir Ed Elgar should get royalties).

And  Judge Cohen, with an eye to the future, cuts to the chase.

“The real issue for tax purposes has long been held to be the extent to which the transaction complies with arm’s length standards and normal business practice. The various factors are only aids in answering the ultimate question of whether there was ‘a genuine intention to create a debt, with a reasonable expectation of repayment, and did that intention comport with the economic reality of creating a debtor-creditor relationship?’  The form of the transaction and the labels the parties place on the transaction may not have as much significance when the parties can mold the transaction at their will.    The Internal Revenue Service recently released proposed regulations in an attempt to bring clarity and consistency to the analysis of distinguishing between indebtedness and equity investments.  See Notice of Proposed Rulemaking, 81 Fed. Reg. 20912 (Apr. 8, 2016).  Because the transaction at issue in these cases took place more than 20 years ago, we mention these regulations for posterity’s sake only.” 2016 T. C. Memo. 139, at p. 24. (Citations omitted).

This was an equity investment disguised as a loan. There was no negotiation, Torgeir and crew were on all sides of the table, and the only aim was not to pay tax. This went beyond the deal driven by economic or regulatory realities, but devised in a tax-efficient manner, which is OK.

Economic substance, fellas. Arms’-length dealing.

Unfortunately, Torgeir doesn’t dodge the chops, as he did in my blogpost aforementioned.

Takeaway—If you’re doing notes, make them real. Tell ‘em Torgeir sent you.


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