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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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