- 26 -
by its shareholders (i.e., Mr. Roven and his children).
According to respondent, the fact that Kenilworth and petitioner
were related leads to a presumption that the advances were
constructive dividends to Mr. Roven (from petitioner), followed
by his constructive contribution to the capital of Kenilworth,
which is in part a gift to his children. We are not persuaded by
respondent's argument, and the facts of this case do not support
it.
This factor favors classifying the advances as debt.
x. Payment of interest out of "dividend money"
The presence of a fixed rate of interest and actual interest
payments points toward debt. The absence of interest payments in
accordance with the terms of a debt instrument points toward
equity. American Offshore, Inc. v. Commissioner, 97 T.C. 579,
604 (1991).
The advances were repayable without interest. In the normal
setting, this fact would indicate that the advances were equity.
Mr. Roven testified, however, that he did not believe that he had
to pay interest on the advances for them to be debt. We believe
that Mr. Roven's credible testimony adequately explains the lack
of interest payments in the setting of this case. Given the
additional fact that petitioner and Kenilworth intended for all
of the advances to be short-term loans, we do not believe that
the lack of interest payments supports a finding of equity in
this case.
Page: Previous 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 NextLast modified: May 25, 2011