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has the burden of proof unless otherwise provided by statute or
the Court).
Second, the payments themselves may denote the nature of
debt or equity. The source, the consistency, and the enforcement
of repayment are factors to consider. The repayment to
petitioner was inconsistent and appeared dependent on financial
success. Accordingly, the source of the repayment was more like
equity rather than debt. Moreover, while petitioner insists that
there was a right to enforce payments from the three companies,
petitioner never made any efforts to do so beyond recovering the
cash surrender value of FWC’s life insurance policy on Mr.
Cerand.
The third group of factors are those factors traditionally
considered by lenders, such as capitalization, risk, the
availability of financing from outside sources and the use to
which advances are put. “[T]he touchstone of economic reality is
whether an outside lender would have made the payments in the
same form and on the same terms.” Segel v. Commissioner, supra
at 828. The three new companies were thinly capitalized, with no
capital assets, and more than $1.4 million was advanced over time
to meet operating expenses. With thin capitalization and no
historical success, there was considerable risk in advancing the
funds. That risk became reality when the three companies failed
to repay over two-thirds of the money they received from
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Last modified: May 25, 2011