- 24 -
United States, supra at 1412; see also Church of Scientology v.
Commissioner, 823 F.2d 1310, 1319 (9th Cir. 1987), affg. 83 T.C.
381 (1984); Sun Properties v. United States, 220 F.2d 171, 174
(5th Cir. 1955).
This factor favors classifying the advances as debt.
viii. Capitalization
Thin or inadequate capitalization points toward equity.
Hardman v. United States, supra at 1414. The same is true with
respect to advances which are made to a corporation with an
excessive debt to equity ratio. Roth Steel Tube Co. v.
Commissioner, 800 F.2d at 632. The ratio of debt to equity is
measured by comparing the corporation's total liabilities to its
stockholders' equity. Stockholders' equity equals the
corporation's assets minus its liabilities. Bauer v.
Commissioner, 748 F.2d at 1368.
The record does not allow us to measure with any precision
the ratio of Kenilworth's debt versus its equity on each of the
relevant dates. We also do not know with certainty the ratio of
debt versus equity that is commonplace in a business such as
Kenilworth's. Ordinarily, we count any gap in the record against
the taxpayer; i.e., the party with the burden of proof. See
Rule 142(a). In the setting of this case, however, we do not
5(...continued)
petitioner and Kenilworth classified the advances as loans when
they prepared their income tax returns because they wanted to
transfer losses between themselves.
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