## Facts

- Scriptomatic, Inc., a closely held corporation, issued two series of instruments to its shareholders: 1963 “original” debentures and 1965 Series “B” debentures.
- Scriptomatic made periodic payments to the debenture holders labeled as “interest” and deducted those payments under I.R.C. § 163.
- The United States disallowed the deductions, treating the instruments as equity in substance and the payments as nondeductible dividends.
- Scriptomatic paid the assessed tax and sued for a refund in federal district court.
- A jury answered special interrogatories in a manner that resulted in judgment for the United States (equity characterization).
- The district court granted Scriptomatic judgment notwithstanding the verdict (JNOV), concluding the undisputed evidence permitted only a debt characterization under governing Third Circuit precedent.
- The United States appealed the JNOV.

## Issues

1. Whether the shareholder-held “debentures,” assessed under an economic-reality, multi-factor analysis, constituted debt or equity for federal tax purposes.
2. Whether payments on the instruments were deductible as “interest” under I.R.C. § 163 or were nondeductible dividends.
3. Whether JNOV was proper despite a jury verdict for the government where the record evidence was essentially undisputed.

## Decision

- The Third Circuit affirmed the district court’s entry of JNOV for Scriptomatic.
- The court held that, on the record presented, the instruments functioned as genuine debt rather than equity.
- The payments were therefore deductible as interest under I.R.C. § 163.
- The court concluded that reasonable minds could not classify the instruments as equity under the controlling economic-reality standard, making JNOV appropriate.

## Legal Principles

- Debt-versus-equity classification turns on the instrument’s economic reality: whether it represents risk capital subject to corporate fortunes (equity) or a strict debtor–creditor relationship (debt).
- Multi-factor lists used in debt–equity analysis are nonexclusive aids and are not mechanically applied; no single factor or set of factors is conclusive.
- In closely held corporations, courts must look beyond form because the same parties may stand on both sides of the transaction; shareholder status does not, by itself, negate bona fide debt.
- Although debt–equity characterization is often fact-intensive, when underlying facts are essentially undisputed and only one conclusion is legally permissible, the question may be resolved as a matter of law and support JNOV.

## Conclusion

The Third Circuit upheld judgment for Scriptomatic, ruling that the shareholder “debentures” were debt in substance and that the corporation’s payments were deductible interest under I.R.C. § 163, notwithstanding the jury’s contrary special verdict.


Scriptomatic, Inc. v. United States, 555 F.2d 364 (3d Cir. 1977)