American Underwriters, Inc. - Page 20

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               This factor is neutral, and we give it no weight.                      
               iii.  Source of repayment                                              
               Repayment that is dependent upon corporate earnings points             
          toward equity.  Repayment that is not dependent on earnings                 
          points toward debt.  Hardman v. United States, supra at 1413;               
          Roth Steel Tube Co. v. Commissioner, 800 F.2d 625, 632 (6th Cir.            
          1986), affg. T.C. Memo. 1985-58; In re Lane, 742 F.2d 1311, 1314            
          (11th Cir. 1984); American Offshore, Inc. v. Commissioner, supra            
          at 602.  Purported debt is usually equity when its repayment is             
          directly dependent on the profits of the debtor's business.                 
          Segel v. Commissioner, 89 T.C. 816, 830 (1987).                             
               Respondent would have us rely primarily on Kenilworth's                
          balance sheets, with particular emphasis on its retained                    
          earnings, to conclude that Kenilworth had a minimal net worth on            
          the relevant dates.  We refuse to do so.  Kenilworth's balance              
          sheets are based on historic cost and do not report current                 
          value.  We note, however, that Kenilworth had a balance sheet net           
          worth of $400,485 at the beginning of its 1987 taxable year, and            
          that its balance sheet net worth only fell to negative $971,002             
          at the end of that year, notwithstanding the fact that it lost at           
          least $23.6 million on the day of the Crash.  Contrary to                   
          respondent's assertion, we do not believe this factor supports a            
          finding of equity.                                                          
               This factor is neutral, and we give it no weight.                      






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