Joseph Nachman - Page 17

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                  No specific ratio of debt to equity determines whether a                             
            corporation is adequately capitalized.  2554-58 Creston Corp. v.                           
            Commissioner, 40 T.C. 932, 937 n.3 (1963).  We have held that                              
            debt to equity ratios of 800 to 1, American Offshore, Inc. v.                              
            Commissioner, supra at 604; 205 to 1, 2554-58 Creston Corp. v.                             
            Commissioner, supra at 937; and 123 to 1, Ambassador Apartments                            
            v. Commissioner, supra at 245, showed that an advance was equity.                          
            In Bauer v. Commissioner, supra at 1370, the U.S. Court of                                 
            Appeals for the Ninth Circuit held that debt to equity ratios                              
            ranging from 2 to 1 to almost 8 to 1 did not show that advances                            
            were equity.  In Kraft Foods Co. v. Commissioner, 232 F.2d 118,                            
            127 (2d Cir. 1956), the U.S. Court of Appeals for the Second                               
            Circuit held that a debt to equity ratio of .77 to 1 did not show                          
            that advances were equity.                                                                 
                  Swirl's debt to equity ratios were as follows:                                       
            Year    Liabilities            Equity           Debt-Equity Ratio                          
            1983     $5,171,502          $2,234,108              2.31 to 1                             
            1984      6,382,277           1,973,577              3.23 to 1                             
            1985      5,876,278           2,075,305              2.83 to 1                             
            1986      6,807,846           1,417,161              4.89 to 1                             
            1987      6,667,408           1,144,964              5.82 to 1                             
                  This chart is based on audited fiscal yearend Swirl                                  
            financial statistics.  Based on an unaudited mid-fiscal-year                               
            Swirl balance sheet, respondent contends that Swirl’s debt to                              
            equity ratio was 6.4 to 1 on December 31, 1987.  Even if                                   
            respondent's computation is proper, these ratios do not establish                          







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