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ESTATE OF THOMAS H. FRY, DECEASED, RUTH M. FRY, PERSONAL REPRESENTATIVE, AND RUTH M. FRY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, T.C. Memo. 2024-8

A deficiency in Thomas H. Fry and Ruth M. Fry’s 2013 joint federal income tax of $1,318,597, an addition to tax under section 6651(a)(1) of $65,930, and an accuracy-related penalty under section 6662(a) of $263,719. The issues for decision are whether (1) the Transfers and the Payments from Crown Disposal, Inc. (Crown), to CR Maintenance Services, Inc. (CR Maintenance), are bona fide debt or equity, (2) Mr. Fry had an adequate basis to claim the disallowed flowthrough loss from CR Maintenance of $3,455,006, (3) respondent is harmed by a finding that the Transfers and the Payments are equity, (4) the Frys are liable for the late filing addition to tax pursuant to section 6651(a)(1), and (5) the Frys are liable for the accuracy-related penalty pursuant to section 6662(a) and (b)(2) for a substantial understatement of income tax.

Background

Mr. Fry was the sole shareholder of two S corporations, Crown and CR Maintenance, which conducted business operations in a highly integrated manner despite being organized as separate businesses. In 2013 CR Maintenance was based in Sun Valley, California. Crown was based in the same facility as CR Maintenance. From 2008 through 2015 Mr. Fry received an officer salary and rent payments from both CR Maintenance and Crown.

Crown’s business operations included the collection of trash, recyclables, and other waste from individuals, apartment buildings, and commercial establishments for a fee. CR Maintenance’s business operations consisted of processing the trash, recyclables, and other waste collected by Crown into commodities such as alfalfa, olive oil, and wheat for sale to third parties. Crown did not pay CR Maintenance for taking possession of the waste collected, nor did Crown share collection fees with CR Maintenance.

Crown and CR Maintenance conducted an integrated business operation, shared the same principal place of business, and used the same maintenance, payroll, corporate officers, and accountant. Mr. Fry was the president and treasurer of both Crown and CR Maintenance. John Richardson was the vice president and corporate secretary for both Crown and CR Maintenance. Gary Margolis was the accountant for Mr. and Mrs. Fry, CR Maintenance, and Crown. Mr. Margolis had been a certified public accountant (CPA) for 31 years and had been Mr. Fry’s accountant for approximately 20 of those years. As Mr. Fry’s accountant, Mr. Margolis prepared the tax returns for the Frys, CR Maintenance, and Crown.

Profitability of CR Maintenance

By 2010 CR Maintenance was not profitable and required substantial financial support to meet its obligations. During 2011 a contract between the City of Los Angeles and CR Maintenance was withdrawn by the City after an accident resulted in the death of two CR Maintenance employees. Following the withdrawal of the contract with the City, CR Maintenance was never profitable again and began losing between $5 and $7 million per year.

Beginning in 2010 and through 2013 Crown provided financial support to CR Maintenance to allow it to continue operating. During this period Mr. Richardson and Mr. Fry would meet each month to review the financial positions of Crown and CR Maintenance to determine whether CR Maintenance required additional funds from Crown to meet its obligations. If CR Maintenance was unable to meet its obligations for that month, Mr. Fry would instruct Crown to transfer funds via check or bank-to-bank transfers directly to CR Maintenance (Transfers). Crown did not distribute cash to Mr. Fry, nor did Mr. Fry contribute cash to CR Maintenance. CR Maintenance used the Transfers to pay general business operating costs. During this period Crown, on behalf of CR Maintenance, also made payments directly to CR Maintenance’s vendors for certain expenses such as fuel, wages, payroll taxes, workers’ compensation insurance, and employee benefits. At trial Mr. Richardson testified that Mr. Fry treated his companies like his “baby” and wanted to ensure that both CR Maintenance and Crown continued operating.

At the end of 2013 the net total of the Transfers and the Payments was $36,255,141, which accounts for the money that CR Maintenance transferred back to Crown by the end of 2013. CR Maintenance had not made any transfers back to Crown of any portion of the Transfers; however, CR Maintenance had transferred a portion of the Payments back to Crown by the end of 2013. By the end of 2020 CR Maintenance had transferred back to Crown the total amount of the Transfers and the Payments it had received between 2006 and 2020.

Characterization of the Transfers and the Payments

Despite the Transfers and the Payments by Crown of some $36 million, CR Maintenance did not provide any promissory notes regarding the Transfers and the Payments and did not have any written due dates for a return of the money. No security interest was requested by Crown or granted by CR Maintenance. Furthermore, CR Maintenance did not make, nor promise to make, interest payments related to the Transfers and the Payments.

CR Maintenance accounted for each of the Transfers from Crown as a “Loan Payable” in its general ledger liability from 2010 through 2014. From 2006 through 2013 CR Maintenance accounted for the Payments made by Crown as “Due to Crown” in another general ledger liability account. From 2010 through 2017 CR Maintenance documented the Transfers and the Payments as liabilities between CR Maintenance and Crown. From 2006 through 2013 Crown accounted for the expenses it paid on CR Maintenance’s behalf as “Due from CR [Maintenance].” Crown documented the Transfers and the Payments as liabilities between Crown and CR Maintenance from 2010 through 2017. CR Maintenance intended to repay Crown for the Transfers and the Payments if it was profitable.

From 2010 through 2020 CR Maintenance reported the Transfers and the Payments as a balance due to Crown on its tax returns and characterized them as debts. On its returns filed between 2009 and 2019 CR Maintenance did not report the Transfers and the Payments as additional capital contributions from Mr. Fry. Crown reported the Transfers and the Payments as a liability due from CR Maintenance on its tax returns for 2010 through 2020 and characterized these transactions as indebtedness.

The Frys did not report distributions from Crown to Mr. Fry on their tax returns filed between 2008 and 2019. However, between 2008 and 2020, Crown did report distributions and repayment of shareholder loans on Mr. Fry’s Schedules K–1, Shareholder’s Share of Income, Deductions, Credits, etc., as follows:

On November 10, 2014, the Frys untimely filed their joint Form 1040 for the 2013 tax year, which was due on October 15, 2014. For tax year 2013 CR Maintenance filed Form 1120S, U.S. Income Tax Return for an S Corporation, and reported an ordinary loss of $5,650,651. The Frys claimed a flowthrough loss deduction of $4,733,675 from CR Maintenance on their individual return for the 2013 tax year.

In 2015 Crown and CR Maintenance received cash from their sale of most of their assets for about $70 million. Crown distributed all of its cash from the sale of its assets to Mr. Fry in 2015, 2016, and 2017. After Crown distributed the remaining cash to Mr. Fry from the sale of its assets to Recology, Mr. Fry received no further distributions from Crown.

Following the distributions of the cash to Mr. Fry, Crown had insufficient assets for tax years 2017 through 2020 to make any further distributions to Mr. Fry. The “distributions” on Crown’s tax returns were not actual distributions but accounting entries intended to balance Crown’s balance sheet. On Form 1120S the reductions appear as distributions, but no such distributions actually occurred. The reductions of amounts described as “Due from” CR Maintenance by Crown were write-offs of the Transfers and the Payments as “bad debts” for 2017 through 2020. At trial it was established that Mr. Margolis performed the adjustment to “offset between [CR Maintenance] and Crown exactly everything that [CR Maintenance] owed Crown” for 2017 through 2020. These entries were accounting “plugs” or noncash distributions. Without the use of accounting plugs, the basis for tax years 2017, 2018, and 2019 would have been greater than the losses claimed for those years.

Notice of Deficiency and Period of Limitations

On September 28, 2020, respondent issued the Frys a notice of deficiency for tax year 2013 determining a deficiency in income tax, an addition to tax pursuant to section 6651(a)(1), and an accuracy-related penalty pursuant to section 6662(a). Following the examination the IRS determined the flowthrough loss from CR Maintenance was $1,276,231 and disallowed $3,457,444 in flowthrough loss because of Mr. Fry’s lack of basis. Respondent has conceded that the Frys are entitled to an additional $2,438 in flowthrough loss. Respondent’s initial determination to assert an accuracy-related penalty was personally approved in writing by the examiner’s immediate supervisor.

The periods of limitations for examining the Frys’ individual income tax returns for tax years 2008 through 2012 and 2014 through 2019 have expired. The periods of limitations for examining CR Maintenance’s Forms 1120S, Schedules K–1, and amended Forms 1120S for tax years 2008 through 2019 have expired. The periods of limitations for examining Crown’s Forms 1120S and amended Forms 1120S for tax years 2008 through 2019 have expired.

The Frys filed Form 1040X, Amended U.S. Individual Income Tax Return, to amend their 2010 tax return. CR Maintenance filed an amended tax return for tax year 2010. Crown filed amended tax returns for tax years 2008 and 2010.

OPINION

Summary of the Parties’ Arguments

Petitioners’ Argument

Petitioners argue that under relevant caselaw, the Transfers and the Payments from Crown to CR Maintenance were not bona fide debt; rather, they were constructive equity contributions and distributions. Petitioners further argue that if the Transfers and the Payments are considered equity contributions, Mr. Fry had a sufficient stock basis to deduct $3,455,006 in flowthrough losses from CR Maintenance on their 2013 tax return. Moreover, petitioners assert that if the Frys are found liable for a penalty pursuant to section 6662(a), the Frys are entitled to a reasonable cause defense since they relied in good faith on the advice of their accountant.

Respondent’s Argument

Respondent argues Mr. Fry had insufficient stock basis to claim the disallowed flowthrough loss. Respondent further argues that because the Frys have consistently characterized the Transfers and the Payments between Crown and CR Maintenance as debt between the two S corporations, they are prohibited from recharacterizing them as equity contributions. Respondent asserts that section 385(c), the duty of consistency, and the doctrine of election prohibit the recharacterization of the Transfers and the Payments from debt to equity as their original characterization was debt. Respondent averse that permitting the Frys to recharacterize the debt as equity would result in prohibited flowthrough losses for them for tax years 2017 and 2018. These tax years are now closed for assessment since the period of limitations has expired. Furthermore, respondent notes that the Frys had the prior opportunity to characterize the Transfers and the Payments as equity when filing their tax returns and preparing their financial documentation, but they elected to treat the Transfers and the Payments as loans.

Burden of Proof

In general, the Commissioner’s determinations set forth in a notice of deficiency are presumed correct, and the taxpayer bears the burden of proving otherwise. Rule 142(a)(1); Welch v. Helvering , 290 U.S. 111, 115 (1933).

The burden of proof may shift to the Commissioner if the taxpayer introduces credible evidence with respect to any factual issue relevant to ascertaining the proper tax liability and establishes that he or she complied with the requirements of section 7491(a)(2)(A) and (B) to substantiate items, to maintain required records, and to cooperate with the Commissioner’s reasonable requests. I.R.C. § 7491(a)(1) and (2).

Petitioners argue that the burden of proof has shifted to respondent since they claim to have cooperated with all requests for witnesses, documents, information, meetings, and interviews during the examination. Respondent notes that petitioners did not provide all documents requested during the examination and contends therefore that they failed to provide credible evidence sufficient to shift the burden of proof to respondent.

Characterization of Debt Versus Equity

The determination as to whether a particular interest is characterized as debt or equity is generally made with reference to various factors that indicate the economic substance of a transaction. See I.R.C. § 385(b) (setting forth five factors that may be included in any regulations prescribed by the Secretary to determine, with respect to a particular factual situation, whether a debtor-creditor relationship exists or a corporation-shareholder relationship exists); see also Hardman v. United States , 827 F.2d 1409, 1412 (9th Cir. 1987) (setting forth the 11 factors that the U.S. Court of Appeals for the Ninth Circuit applies to characterize a taxpayer’s interest in a corporation). Absent stipulation to the contrary pursuant to section 7482(b)(2), appeal of this case would lie to the Ninth Circuit, and we thus follow its precedent. See I.R.C. § 7482(b)(1)(A).

Petitioners ask us to find that the Transfers and the Payments are equity, not debt. Petitioners contend that the Transfers and the Payments were constructive distributions from Crown to Mr. Fry and constructive contributions by Mr. Fry to CR Maintenance. Therefore, petitioners argue that Mr. Fry had sufficient stock basis to allow the Frys to claim the flowthrough losses on their 2013 tax return.

Crown and CR Maintenance are S corporations taxed in accordance with subchapter S of the Code. See I.R.C. §§ 1361–1379. Under section 1371, the provisions of subchapter C of the Code are applicable to S corporations. See I.R.C. §§ 301–385. Section 385(a) authorizes the Secretary to prescribe “regulations as may be necessary or appropriate to determine whether an interest in a corporation is to be treated . . . as stock or indebtedness,” i.e., equity versus debt. As stated above, section 385(b) sets forth five factors that may be included in any regulations prescribed by the Secretary.

Caselaw Factors

The Ninth Circuit in Hardman identified the following factors as potentially relevant to the debt-vs-equity inquiry: (1) the names given to the certificates evidencing the debt; (2) the presence or absence of a fixed maturity date; (3) the source of the payments; (4) the right to enforce payments of principal and interest; (5) whether the advances increase participation in management; (6) whether the “lender” has a status equal or inferior to that of regular creditors; (7) objective indicators of the parties’ intent; (8) whether the capital structure of the “borrower” is thin or adequate; (9) the extent to which the funds advanced are proportional to the shareholder’s capital interest; (10) the extent to which interest payments come from “dividend” money; and (11) the ability of the “borrower” to obtain loans from outside lending institutions.

Names Given to the Certificates Evidencing the Indebtedness

The issuance of a debt instrument such as a promissory note indicates debt, and the issuance of an equity instrument such as a stock certificate indicates an equity contribution. If the document at issue includes wording typically contained in a promissory note and does not include wording typically contained in a stock certificate, then this factor will weigh in favor of a finding that the transaction at issue was debt rather than equity.

The Presence or Absence of a Maturity Date

A fixed maturity date is evidence that a debt exists because it requires fulfillment of the financial obligation at a specific time. The lack of a fixed maturity date indicates that payment is linked to the success of the business and is evidence of an equity interest. Similarly, an advance made with a fixed maturity date that has been postponed for a prolonged period suggests that “the nominal lender does not intend to require repayment and that the transfers are equity.”

The Source of Payments

Payments that depend on earnings or come from a restricted source indicate an equity interest. A true lender is concerned with a reliable return on his investment in the form of interest and repayment of principal. If timely payments to the alleged lender are not made, or if they can plausibly be made only out of future earnings, an inference arises that the advances were contributions to capital. When repayment is not dependent upon earnings, the interest is more likely to be characterized as a loan.

The Right to Enforce the Payment of Principal and Interest

The right to enforce payment of principal and interest is evidence of debt. A lender’s failure to take any of the “customary steps” to ensure repayment, such as obtaining a security interest, despite an enforceable right to repayment, supports a conclusion of equity. Nevertheless, the lack of a security interest in connection with a promise to repay is indicative of an equity interest, but it may be less important where the transaction is between related parties.

Participation in Management

If a taxpayer’s advances to a corporation entitle him to greater participation in its management, the advances are more likely to be treated as equity.

A Status Equal to or Inferior to That of Regular Corporate Creditors

If a shareholder’s rights to repayment of principal and interest are subordinated to the rights of regular creditors, then the shareholder’s advances are generally indicative of an equity interest. Even absent an explicit subordination clause, the failure to demand timely repayment or to take collateral effectively subordinates the alleged debt to the rights of other creditors, who may receive payment or foreclose on their security in the interim.

The Intent of the Parties

We examine whether the parties to the transaction intended the interest to be debt or equity. The Court will look at the objective evidence of whether the parties intended to create a “definite obligation, repayable in any event.” The intent at the time of the creation of the interest is persuasive, but the Court uses all 11 factors to determine the “true intent” concerning the creation of the interest. Thin or Adequate Capitalization

The purpose of examining the alleged borrower’s debt-to-equity ratio is to determine whether it is so thinly capitalized that it would be unable to repay the debt if its financial condition worsened. Thin capitalization tends to indicate that a transaction is a capital contribution. A corporation’s debt-to-equity ratio is determined by comparing all of its liabilities to the shareholders’ equity.

Identity of Interest Between Creditor and Stockholder

Advances made by shareholders in proportion to their stock ownership indicate capital contributions. Where a stockholder owns “debt” in the same proportion to which he holds stock in the corporation, the characterization of his advances as “debt” may be suspect. The Court has previously determined that where the same family controlled the issuing and borrowing entities, the interests between borrower and lender were “significantly intertwined” and the factor weighed in favor of equity.

Extent to Which Interest Payments Come from “Dividend” Money

A true lender is concerned with reliable payments of interest. A lack of interest payments and the alleged debtor’s lack of ability to make them suggests that the party who advanced funds is looking to the corporation’s future earnings to achieve a return on his investment, which is indicative of equity. This factor is effectively the same as the third Hardman factor.

The Ability of the Corporation to Obtain Loans from Outside Lending Institutions

If the corporation is able to obtain funds from outside sources on substantially the same terms as those imposed by the payor of the advance, an inference arises that the advance may be debt. Evidence that the corporation would not have been able to obtain a loan from an independent source indicates equity. Where there is no evidence that a taxpayer was unsuccessful in attempts to obtain independent financing, the Court will consider this factor neutral.

Outcome of the Hardman Factors

Of the 11 factors listed in Hardman , 4 are neutral, 6 favor equity, and 1 favors debt. After weighing the factors in the context of this case we conclude it is more likely than not that the Transfers and the Payments in question do not constitute true indebtedness. Next, we must determine whether the transactions in question can be recharacterized as constructive distributions from Crown to its shareholder, Mr. Fry, followed by contributions of capital to CR Maintenance.

Constructive Distribution/Contribution

A distributionneed not be formally declared or even intended by a corporation to be deemed a constructive distribution. “It is well established that transfers between related corporations may result in constructive dividends to a common shareholder.” “A greater potential for constructive dividends exists in closely held corporations where dealings between stockholders and the corporation are commonly characterized by informality.” Under Ninth Circuit caselaw, a constructive dividend occurs where a two-part test is met: (1) the expenditures do not give rise to a deduction on behalf of the distributing corporation and (2) the expenditures create “economic gain, benefit, or income” to the shareholder.

The crucial determination of whether a constructive dividend exists turns on the question of whether the distribution was primarily for the benefit of the shareholder. A showing that the corporation, rather than the shareholder, was the primary beneficiary of a distribution is required to avoid constructive distribution treatment. Whether the shareholder primarily benefited from the distribution is a question of fact. “Generally, a constructive distribution occurs when corporate assets are diverted to or for the benefit of a shareholder without adequate consideration for the diversion.” A transfer between related corporations can be a constructive dividend to common shareholders even if those shareholders do not personally receive the funds.

In order to meet the second prong of the Ninth Circuit’s test, the shareholder must receive an actual, direct benefit. Finding that where there was no discernable business reason to make a transfer between related entities, as there was no expectation of interest or repayment, the primary benefit was to the shareholder because it reduced the liabilities of his other entities. Finding that where advances were made from one corporation to another to further the latter’s business as a “viable and profitable corporation,” they constituted a primary benefit to the 50% shareholder rather than a business purpose.

Both prongs of the constructive dividend test are satisfied as the constructive distributions were made primarily for Mr. Fry’s benefit. Accordingly, we conclude that the Transfers and the Payments constituted constructive distributions from Crown to Mr. Fry, followed by constructive contributions from Mr. Fry to CR Maintenance.

Mr. Fry’s Basis

Subchapter S corporations are flowthrough entities. A shareholder in an S corporation is entitled to deduct his share of entity level losses in accordance with the flowthrough rules of subchapter S. Section 1366(d)(1) limits the amount of losses and deductions the shareholder may deduct as not exceeding the sum of the shareholder’s adjusted basis in his stock and the shareholder’s adjusted basis in indebtedness of the S corporation to the shareholder.

Respondent argues that Mr. Fry has insufficient stock basis to claim the flowthrough loss of $4,733,675 for the 2013 tax year. Petitioners argue that the Transfers and the Payments, when reclassified as deemed distributions from Crown to Mr. Fry and deemed capital contributions from Mr. Fry to CR Maintenance, provide additional basis in CR Maintenance to claim these losses.

The parties agree that at the end of 2013, Mr. Fry’s debt basis in CR Maintenance was $1,276,231 and his stock basis was $2,438. At the end of 2013 Mr. Fry’s debt basis in Crown was $42,724,064 and his stock basis was $584,500. As noted above, the Court agrees with petitioners’ contentions that the Transfers and the Payments in question were deemed distributions from Crown to Mr. Fry followed by deemed capital contributions from Mr. Fry to CR Maintenance. The record reflects adequate basis in Crown; however, this calculation is before the Transfers and the Payments in question are recharacterized as distributions from Crown to Mr. Fry.

The record contains insufficient information for the Court to recalculate Mr. Fry’s adjusted basis in CR Maintenance and Crown. Accordingly, we instruct the parties to calculate Mr. Fry’s basis in CR Maintenance and Crown beginning in 2013 through 2020, in the light of this Court’s decision, pursuant to Rule 155. This calculation should also be used to determine the appropriate amount of flowthrough loss the Frys are entitled to for tax year 2013 and determine the harm (if any) facing respondent, which is addressed below.

Harm to Respondent

Respondent argues that if the Transfers and the Payments from Crown to CR Maintenance are recharacterized as distributions followed by contributions, Mr. Fry would have had a zero basis in Crown by the end of 2017, resulting in an insufficient basis for Mr. Fry to claim losses in subsequent years from Crown. Respondent alleges harm because of the closed period of limitations precluding him from examining the tax returns of Crown, CR Maintenance, and the Frys. On their 2017 and 2018 tax returns the Frys reported losses from Crown of $712,495 and $411,577, respectively. Respondent argues that allowing the Frys to recharacterize the debt as equity would let them claim flowthrough losses on their tax returns for which they were otherwise ineligible. At trial respondent called the Revenue Agent who prepared a spreadsheet reflecting how Mr. Fry’s basis in Crown goes below zero in 2017 and a financial harm to respondent, should the Frys be permitted to reclassify both the Transfers and the Payments as equity in CR Maintenance.

Petitioners dispute respondent’s argument of harm by contending that the basis calculations respondent presented and relied upon to demonstrate that the distributions from Crown beginning in 2017, purportedly in excess of Mr. Fry’s basis in Crown, were not actual distributions. Rather, petitioners contend that these adjustments were merely “accounting entries, not economic transactions.” Petitioners argue that Mr. Margolis adjusted Crown’s account to correct these incorrect prior characterizations of the Transfers and the Payments as “due from” CR Maintenance on Crown’s balance sheet and returns. Mr. Margolis “wrote down” the purported loans from CR Maintenance as they were incorrectly classified as assets on Crown’s balance sheet thereby reducing Crown’s shareholder equity. On Form 1120S, this reduction appears as a “distribution,” but no such distribution actually occurred as Crown lacked sufficient cash and assets beginning in 2017 to make the distributions alleged to have occurred and never deducted any interest on their returns. At trial Mr. Margolis testified that he performed the adjustment to “offset between [CR Maintenance] and Crown exactly everything that [CR Maintenance] owed Crown” for 2017 through 2020.

We find the rebuttal testimony of Mr. Margolis compelling and sufficient to dispute respondent’s calculations reflecting an alleged financial harm. Therefore, and as found above, the parties will submit revised basis calculations, pursuant to Rule 155, reflecting Mr. Fry’s basis in CR Maintenance and Crown and confirming adequate basis remain in both entities to support the positions claimed by the Frys with respect to the closed tax years.

Representation by the Taxpayer

In applying the first element of the duty of consistency, the Ninth Circuit requires that a taxpayer make a representation of fact or reported an item for tax purposes. A taxpayer’s treatment of an item on a tax return can be a representation that facts exist which are consistent with how the taxpayer reports the item on the return.

Reliance by the IRS Commissioner

The second element of the duty of consistency is reliance by the IRS Commissioner on the taxpayer’s representation, which occurs where a taxpayer’s return is accepted as filed and examination of the return is not required. The IRS Commissioner may rely on a presumption of correctness of a return or report that is given to the Commissioner under penalties of perjury.

Recharacterization by the Taxpayer Resulting in Harm to the Commissioner

The third element of the duty of consistency requires an attempt by the taxpayer, after the period of limitations has expired, to change the previous representation or to recharacterize the situation in such a way as to harm the Commissioner. Courts have previously found that this element was met in cases where allowing the taxpayers to recharacterize a previous representation would result in significant tax avoidance as a result of the closed period of limitations.

Doctrine of Election

The doctrine of election is an equitable principle that generally precludes a taxpayer who makes a conscious election from revoking or amending that election without the consent of the IRS Commissioner. The doctrine consists of the following two elements: (1) there must be a free choice between two or more alternatives and (2) there must be an overt act by the taxpayer communicating the choice to the IRS Commissioner, i.e., a manifestation of choice.

We are not persuaded by respondent’s allegation of whipsaw, nor are we convinced of the applicability of the duty of consistency and the doctrine of election. We decline to bind the Frys to the original characterization of the Transfers and the Payments as debt based on these three arguments. An analysis of the factors under Hardman clearly demonstrates that the Transfers and the Payments should have been classified as equity. Furthermore, respondent repeatedly alleges harm but has not shown the Court what specific detriment would befall him. Petitioners have persuasively and successfully rebutted respondent’s allegation that Mr. Fry received distributions in excess of basis for subsequent tax years. Accordingly, we hold that the Transfers and the Payments were interests in equity rather than genuine indebtedness and the Frys will be eligible for the entire flowthrough loss, provided Rule 155 computations support their claim of adequate basis.