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iv. Repayment
Repayment that is dependent upon corporate earnings weighs
toward equity. Repayment that is not dependent on earnings
weighs toward debt. Roth Steel Tube Co. v. Commissioner,
800 F.2d at 632; Lane v. United States, 742 F.2d 1311, 1314 (11th
Cir. 1984); American Offshore, Inc. v. Commissioner, supra at
602. Purported debt is usually equity when repayment is at the
whim of the vagaries of the business. Segel v. Commissioner,
89 T.C. 816, 830 (1987).
Repayment of the advances was dependent solely on the
financial success of Adult Fun. Immediate repayment was not
available from Adult Fun's existing assets as Adult Fun had
virtually no assets. At the time petitioner made its advances,
Adult Fun had not yet begun operations and had regularly
sustained losses. In essence, petitioner gambled that Adult
Fun's operations would be successful and lost. Advances made
under these conditions are not bona fide debt.
This factor weighs toward equity.
v. Capitalization
Thin or inadequate capitalization weighs toward equity.
Advances made to a corporation with an excessive debt to equity
ratio are indicative of equity rather than debt. Roth Steel Tube
Co. v. Commissioner, supra at 632.
The record indicates that Adult Fun had virtually no assets.
This factor weighs toward equity.
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