Joseph Nachman - Page 16

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            principal amount of the note show that petitioner's transfer was                           
            equity.  We disagree.                                                                      
                  Petitioner testified that he did not want to spend money and                         
            effort in a futile attempt to collect.  Another reason for not                             
            suing was to avoid problems with Chemical Bank.  Chemical Bank                             
            set the terms by which Sandhurst acquired Swirl.  Gasson                                   
            testified that, if petitioner had insisted that Swirl or New                               
            Swirl repay amounts due on the notes, Chemical Bank would have                             
            not agreed to the sale to Sandhurst.  After examining all the                              
            facts, i.e., how petitioner and Swirl treated the advance on                               
            financial statements and tax returns and that petitioner did not                           
            sue on the notes, we conclude that Swirl and petitioner intended                           
            the advance to be loan.  This factor suggests that the transfer                            
            was a loan.                                                                                
                        g.  Whether the Borrower Is Adequately Capitalized                             
                  An advance to a corporation is more likely to be equity if                           
            the corporation is thinly capitalized.  Gilbert v. Commissioner,                           
            248 F.2d 399, 407 (2d Cir. 1957), remanding T.C. Memo. 1956-137;                           
            American Offshore, Inc. v. Commissioner, 97 T.C. at 604.  To                               
            calculate a debt to equity ratio, we compare a corporation’s                               
            total liabilities to its stockholders' equity.  Bauer v.                                   
            Commissioner, 748 F.2d 1365, 1369 (9th Cir. 1984), revg. T.C.                              
            Memo. 1983-120.  The difference between assets and liabilities                             
            is stockholders' equity.  Bauer v. Commissioner, supra at 1369.                            






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