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the bank to make the loans, were not a sufficient condition. For
the bank to deviate from its loan policy and make the loans, it
had to appear to the bank that the enterprise of the corporation
was going to be successful. At the time the loans were made, the
bank believed that the corporation had the potential to make
repayment.
Thin capitalization and the use of debt proceeds to acquire
essential assets are factors to be considered in the debt-equity
analysis. Alone, or together, however, they are not necessarily
determinative that the corporation had no capacity to raise funds
by borrowing. See, e.g., Fin Hay Realty Co. v. United States,
398 F.2d 694, 697 (3d Cir. 1968). Neither is it necessarily true
that guaranteed indebtedness signifies an equity investment.
See, e.g., Santa Anita Consol., Inc. v. Commissioner, supra at
553. By reducing the lender’s risk, the guaranty may have
secured the borrower a lower rate or a longer term (or both).
Petitioner’s father testified that he agreed to act as guarantor:
“To expedite the loan and hopefully, get a little lower interest
rate.” Indeed, Mr. Sunderland testified that the bank normally
asks principals to guarantee corporate debt.
Petitioners have failed to prove that the corporation had no
capacity to repay the loans. They have failed to prove that
there were not genuine and realistic prospects of repayment by
the corporation. They have failed to prove that the bank looked
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