A B C form X Corporation to develop real estate. A contributes land with an FMV of $ million and an adjusted basis of $ A received shares of stock of X $ each and a year, $ promissory note of X Corporation bearing a market rate of interest. B & C each contribute land with an FMV of $ and adjusted basis of $ They each receive shares of X stock and a year note of X for $ having a market rate of interest. In addition, X Corp borrows $ million from a rd party lender.
Are the various promissory notes of X Corp to A B and C debt or equity?
Would your answer change if the principal and interest of the notes to A B and C were subordinated to the debt owned by the outside lender?
Would you answer chance if the principal and interest of the note to A B and C were to be paid only out of profits of X Corp?
Why A B and C and X care whether the notes are debt of equity?
