Deja Vu, Inc. - Page 14

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          taxpayer could not obtain loans from independent sources weighs             
          toward equity.  Calumet Indus., Inc. v. Commissioner, 95 T.C. at            
          287.  We look to whether the terms of the purported debt were a             
          "patent distortion of what would normally have been available" to           
          the debtor in an arms-length transaction.  See Litton Business              
          Sys., Inc. v. Commissioner, 61 T.C. 367, 379 (1973).                        
               Petitioner presented no evidence on whether it could have              
          obtained financing from an unrelated party at the time of the               
          transfer.  Given the facts, however, that the purported debts               
          were completely unsecured and that Adult Fun did not have a                 
          profitable history at the time of the advances, we are left                 
          unpersuaded that an unrelated third party would have entered into           
          financing with Adult Fun under the terms that petitioner alleges            
          were entered into between it and Adult Fun.  Indeed, we read the            
          record to indicate that it would have been unreasonable for                 
          petitioner to have expected repayment of the advances at the time           
          they were made.  Petitioner made no attempt to evaluate Adult               
          Fun's prospects for success.  It did not request any financial              
          statements or tax returns in order to evaluate Adult Fun's                  
          financial condition.  It did not ask to examine Adult Fun's books           
          and, if it had, it would have seen that Adult Fun's tax returns             
          reported a pattern of losses.  The advances were placed at the              
          risk of Adult Fun’s business, and the terms of the advances were            
          a patent distortion of what would normally have been available in           
          an arm’s-length transaction.                                                

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