The Tax Court determined that an advance from a U.K.-based utility to its wholly owned partnership in connection with the partnership's acquisition of a U.S. utility company was a loan, not a capital contribution. Accordingly, the $932 million of payments made on loan notes was deductible by the partnership as interest.

Whether an advance to a corporation is a capital contribution or a loan depends on the facts and circumstances.
In the Ninth Circuit, to which the instant case is appealable, the following factors are considered in determining whether an advance is debt or equity (11 Indicia of Indebtedness):
(1) The name given to the documents evidencing the indebtedness;
(2) The presence of a fixed maturity date;
(3) The source of the payments;
(4) The right to enforce payments of principal and interest;
(5) Participation in management;
(6) A status equal to or inferior to that of regular corporate creditors;
(7) The intent of the parties;
(8)“Thin” or adequate capitalization;
(9) Identity of interest between creditor and stockholder;
(10) Payment of interest only out of “dividend” money; and
(11) The corporation's ability to obtain loans from outside lending institutions. (Hardman v. U.S., (CA 9 1987) 60 AFTR 2d 87-5651)

Although ScottishPower was the sole shareholder involved in the transaction with NAGP, the court found all the other factors weighed toward a finding it was debt or that the factors were neutral.
If you Need Tax Representation with a Tax Problem, contact the Tax Lawyers at Marini & Associates, P.A. for a FREE Tax Consultation at www.TaxAid.us or www.TaxLaw.ms or Toll Free at 888-8TaxAid (888 882-9243).
Source:
Read more at: Tax Times blog