- 15 -
This factor weighs toward equity.
ix. Subordination
Subordination of purported debt to the claims of other
creditors weighs towards equity. Roth Steel Tube Co. v.
Commissioner, supra at 631-632; Stinnett's Pontiac Serv. Inc. v.
Commissioner, 730 F.2d at 639; Raymond v. United States, 511 F.2d
at 191; Austin Village v. Commissioner, supra at 745.
Petitioner presented no evidence on the order of priority of
Adult Fun’s debts. Given the fact, however, that the advances
were unsecured, petitioner's right to repayment would have been
subordinate to the interests of the secured creditors, if any.
At best, petitioner and the other unsecured creditors could have
shared in the proceeds that remained after the secured creditors
were satisfied.
This factor weighs toward equity.
x. Use of Funds
The transfer of funds from a shareholder to a corporation in
order to meet the corporation’s daily business needs weighs
toward debt. The transfer of funds from a shareholder to a
corporation in order to purchase capital assets weighs toward
equity. Roth Steel Tube Co. v. Commissioner, 800 F.2d at 632;
Stinnett's Pontiac Serv. Inc. v. Commissioner, supra at 640;
Raymond v. United States, supra at 191.
The purported notes represented a long term commitment that
was payable mainly from future income. While some of the
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Next
Last modified: May 25, 2011