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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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