Tax Procedure: Sometimes Substance Over Form Means Equity is Debt

Substance over form 2The notion that substance controls over form does some heavy lifting in the tax world. Among other things, it separates real losses from fake ones; it tells us when debt is really equity; and, as the Ninth Circuit ruled earlier this month, sometimes it can tell us that equity is really debt. Hewlett-Packard Co. v. Comm’r, Nos. 14-73047 & 14-73048, 2017 U.S. App. LEXIS 22536 (9th Cir. Nov. 9, 2017).

In Hewlett-Packard, the taxpayer purchased preferred stock issued by a Dutch company that invested in notes which featured certain interest payments that were contingent upon future events. Hewlett-Packard, 2017 U.S.… Read More

Just Because You Say It’s Debt Doesn’t Mean It Is: Substance Over Form in Action

substance over formTax law focuses on substance, not form, so the labels applied to a transaction don’t control its tax treatment. Among the most common examples of this principle are cases in which debt is treated as an equity investment for tax purposes. Courts generally look at a variety of factors to determine whether what purports to be debt should be treated as an equity investment, and some of the cases are close calls. Others are not, as in Rutter v. Commissioner, No. 15840-14, 2017 U.S. Tax Ct. Memo LEXIS 174 (Sept. 7, 2017), which the Tax Court decided last week.

Rutter involved a prominent scientist who had a history of success in the biotechnology field.… Read More