- 18 -
at 605. We look to whether the terms of the purported debt were
a "patent distortion of what would normally have been available"
to the debtor in an arm's-length transaction. Litton Bus. Sys.,
Inc. v. Commissioner, 61 T.C. at 379.
Petitioner made an advance to National without securing it.
While he alleged that travel agencies were routinely financed in
such a manner by outside lending institutions, we doubt this
occurs without some type of security, especially in light of
National's recent incorporation and financial straits. See
Thompson v. Commissioner, supra at 895. Thus, petitioner failed
to act as a reasonable creditor with respect to an
undercapitalized nascent enterprise. Rather, the advance was
placed at the risk of National's business.
10. Extent to Which the Advance Was Used To Acquire Capital
Assets
Generally, the fact that an advance is used to satisfy the
daily operating needs of a corporation indicates a bona fide
indebtedness, whereas an advance resembles equity if it is used
to acquire capital assets. Estate of Mixon v. United States, 464
F.2d at 410. However, advances to new firms that were initially
capitalized inadequately also resemble equity even though the
advances may be used to meet basic operating costs. See Texas
Farm Bureau v. United States, 725 F.2d at 314; Gilboy v.
Commissioner, T.C. Memo. 1978-114. In the instant case, newly
incorporated National used a portion of the advance to purchase
Page: Previous 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 NextLast modified: May 25, 2011