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Fin Hay Realty Co. v. United States
United States Court of Appeals for the Third Circuit
398 F.2d 694 (1968)
Frank Finlaw and J. Louis Hay together formed the Fin Hay Realty Company (Fin Hay) (plaintiff) to invest in apartment buildings. Finlaw and Hay each contributed cash in exchange for stock. Additionally, each shareholder issued cash advances in exchange for promissory notes. The notes bore interest of 6 percent. The notes were payable on demand, but it was unlikely that Fin Hay would have been able to repay the principal if such a demand were made. Fin Hay used the proceeds from the advances to purchase its initial assets. At all times, Fin Hay was highly leveraged. Both Finlaw and Hay died, and the remaining stock was either redeemed by Fin Hay or bequeathed to Finlaw’s daughters, who became the sole shareholders and sole holders of the Fin Hay notes. Fin Hay paid interest as it became due and deducted the interest payments on its tax returns. The Internal Revenue Service (IRS) disallowed the deductions, claiming that the notes were equity, not debt, for tax purposes. Fin Hay sued the United States (defendant). The district court ruled in favor of the United States, and Fin Hay appealed.
Rule of Law
Holding and Reasoning (Freedman, J.)
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