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family. During this same period the claimed "debt" owed to each
family also remained exactly even. Petitioner and McCabe also
participated extensively in McZand management. They both had
positions as officers and/or directors of McZand, and CTC kept
the books and records for McZand.
In addition, the shareholder advances were under very
different terms than commercial lending. While there were
"notes" executed for at least some of the claimed debt, such
notes bore a stated interest rate of 6 percent and were not
secured. During the same period of time, commercial institutions
were lending funds to McZand Corporation at a rate in excess of 8
percent with such obligations secured by mortgages on the
underlying real estate. Also, interest on the claimed
Zand/McCabe "debt" was not paid but was allowed to accrue over
several years.
Finally, McZand Corporation was thinly capitalized with only
$500 in stock and little retained earnings. As of the close of
the tax year 1977, after taking into account the purported debt
from McCabe to petitioner, the debt-equity ratio was
approximately 25 to 1 with debts exceeding $725,000 and equity at
approximately $30,000. At the close of McZand's 1978 tax year,
the ratio had increased to 35 to 1 with debt in excess of $3
million and potential equity at approximately $85,000. This very
thin capitalization is further reflected by the fact that
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