- 19 -
i. The Extent to Which the Advance Is Used To
Acquire Capital Assets
An advance is more like equity if it is used to acquire
capital assets. Estate of Mixon v. United States, 464 F.2d at
410. Swirl used the $600,000 transferred by petitioner and his
brother as working capital. This factor suggests that the
transfer was a loan.
3. Factors Which Are Neutral
a. Whether an Outside Lender Would Have Lent Funds
to the Corporation When The Advance Was Made
If an outside source would not lend funds to a corporation
when funds are advanced by a shareholder, the advance is more
likely to be equity. Estate of Mixon v. United States, 464 F.2d
at 410; American Offshore, Inc. v. Commissioner, supra at 605.
If the shareholder's advance was made under terms that are far
more speculative than an outside lender would accept, the advance
is likely to be a loan in name only. Fin Hay Realty Co. v.
United States, 398 F.2d at 697; Segel v. Commissioner, 89 T.C.
816, 828 (1987).
Respondent contends that no reasonable lender would lend
money to Swirl when petitioner made the $350,000 advance because
Swirl had losses in 3 of the 4 fiscal years before petitioner
made the advance in 1986, Chemical Bank wanted to end its
lending relationship with Swirl, and Swirl had a working capital
shortfall which created losses of about $1 million from
September 30, 1985, to September 30, 1986. Respondent also
Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 NextLast modified: May 25, 2011