An Empirical Examination of Investor or Dealer Status in Real Estate Sales

A Fact-Oriented Approach In Macro-Case Analysis: A Section 385 Illustration

“…However, Notice 94-47 [1994-1 CB 357] states the intent of the Internal Revenue Service (hereafter IRS or Service) to scrutinize these types of financial instruments. The Internal Revenue Code (IRC) Section 385 gives the IRS authority to impose guidance in resolving the debt-equity issue and indicates that the following five factors should be included in the potential regulations: (1) written unconditional promise to pay on demand, or on a specified date, a sum certain in money and to pay a fixed interest rate; (2) subordination or superiority to other creditors; (3) debt to equity ratio; (4) convertibility into stock; and, (5) Several studies (Bond 1977;Whittington & Whittenburg 1980;Robertson et al 1990;Englebrecht et al 2008) apply macro-case analysis to the debt-equity issue. Generally, most of these studies employ discriminant analysis to find the "best" model as well as influential factors, and they adopt the holdout sample technique to test the model's stability over the sample periods.…”

“…Other than the potential error issue, how to code the independent variables is another critical concern that has not been adequately addressed in prior macro-case analysis research. Typically, prior studies briefly mention the coding method, but only to the extent of when to code a factor as "yes," "missing," or "no" (e.g., Burns & Groomer 1983;Pollard & Copeland 1985;Robertson et al 1990;Englebrecht & Bundy 2004). Even though the coding issue relating to missing data is normally discussed (e.g., Robison 1983), the coding problem is not extensively examined in prior research.…”

“…One application of an established tax decision model is to assist in tax planning or litigation (Bond 1977;Whittington & Whittenburg 1980;Porcano 1982;Burns & Groomer 1983;Robison 1983;Robertson et al 1990;Englebrecht & Bundy 2004). Nevertheless, where an opinion-oriented decision model is exclusively based on courts' subjective opinions, the outcome prediction becomes unfeasible.…”

“…iv The traditional debt-equity principles usually are applied to guaranteed debt in cases where the IRS argues the advances made in the form of a guaranteed debt are capital contributions in substance. Englebrecht and Bundy (2004) handle missing variables conservatively. That is, missing data in a case are coded against taxpayers.…”