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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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