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petitioner made the advance, both petitioner and Mr. Magness
understood that Mr. Magness had no way of repaying the money
unless the Corbin properties sold. Further, they agreed the
payments would be made from the sales proceeds of the Corbin
properties.
Petitioner contends that his agreement with Mr. Magness did
not "turn the loan into an investment" because he "was to be paid
when the project sold, not if it sold". Petitioner also stresses
that Mr. Magness’ failure to sell the Corbin properties was due
to California’s failing economy and real estate market. Although
we agree with petitioner that it is difficult to predict how the
real estate market will behave in the future, a reasonably
prudent person can foresee that the project may not be
successful, and the properties may not sell. Petitioner claims
he has sold spec houses in the past for a profit; thus,
petitioner either knew or should have known of the risks involved
in the Corbin project when he advanced Mr. Magness the money.
Petitioner knew at the time he made the advance to Mr. Magness
that repayment was impossible unless the Corbin project sold.
Under the circumstances, petitioner acted more like a "classic
capital investor" than a true creditor. Calumet Indus., Inc. v.
Commissioner, supra at 288. This factor favors respondent’s
position.
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