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26 Tax L. Rev. 369 (1970-1971)
The Federal Income Tax Significance of Corporate Debt: A Critical Analysis and a Proposal

handle is hein.journals/taxlr26 and id is 377 raw text is: The Federal Income Tax Significance
of Corporate Debt:
A Critical Analysis and a Proposal
[S]tockholders of corporations have always been free to commit to
corporate operations such capital as they choose and to lend such ad-
ditional amounts as they may elect to assist in the operation if that is
their true intent, always thus reserving the right to share with other
creditors a distribution of assets if the enterprise fails.,
[T]he search for this intent often takes on an Alice in Wonderland
quality when a stockholder is dealing with his closely-held corpora-
tion .... 2
When I use a word, Humpty Dumpty said ... , it means just
what I choose it to mean-neither more nor less.
The question is, said Alice, whether you can make words mean
so many different things.
The question is, said Humpty Dumpty, which is to be master-
that's all. 3
In many ways-some obvious and well known, others more subtle
the federal tax law draws a sharp distinction between the tax
consequences of debt and of stock, of interest and of dividends;
but it provides no definitions of those concepts.4 The Supreme
*Wmwxm T. PrDIIB, JR. is a member of the District of Columbia Bar and is a
partner in the firm of Hogan & Hartson in Washington, D.C.
I Rowan v. United States, 219 F.2d 51, 55 (5th Cir. 1955).
2 Albert Ravano, 26 T.C.M. 793, 799 (1967).
3 CARaoLL (DODGSON), THEOuGH THE LOOKING GLASS, eh. VI, 238 (1946 ed.).
4 The absence of a statutory definition appears to be a pernicious legacy of a bygone
era of federal taxation... when the rustic simplicity of the label... was sufficient
Kurzner v. United States, 413 P.2d 97, 99 (5th Cir. 1969) (referring to the vord cor-
poration). The most the Code can offer is a declaration that The term 'stoch' includes
shares in an association, joint-stock company, or insurance company.2 LR.O. § 7701
(a)(7). The existing regulations contribute little to a solution, in stating, A bona
fide debt is a debt which arises from a debtor-creditor relationship based upon a valid
and enforceable obligation to pay a fixed or determinable sum of money. Beg. § 16-
1(e). For limited purposes, the regulations go into more detail concerning the effect of
subordination and contingency of principal and interest. Beg. § 1.302-4(d); Beg.
§ 1.545-2(g) (2). The definition of a dividend in section 318(a), although sometimes
cited in this connection (Pacific Southwest Realty Co. v. Comm'r, 128 F.2d 8IG, 818
(9th Cir.), cert. ened, 317 U.S. 663 (1942)), really begs the present question and con-
tributes little, if anything, to its solution.

Imaged with the Permission of N.Y.U. Tax Law Review

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