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year terms for leveraged buyouts. We are not convinced by that
testimony. First, petitioners' commercial loans during the years
in issue were generally for 5 years. Second, leveraged buyouts
typically require the borrower to provide a security interest in
its assets, and are subject to financial covenants which impose
severe restrictions unlike the LIIBV advances.
This factor supports treating the LIIBV advances to
petitioners as equity.
4. Whether the Provider of the Funds Has the Right to
Enforce Payment of Principal and Interest
A definite obligation to repay an advance suggests that the
advance is a loan. Estate of Mixon v. United States, supra; see
Campbell v. Carter Found. Prod. Co., 322 F.2d 827, 832 (5th Cir.
1963). The documents evidencing the LIIBV advances showed that
LIIBV had a right to enforce payment of principal and interest.
Petitioners contend that these loan agreements are significant
because they were legally binding. We disagree because LIIBV and
petitioners did not enforce any of the loan agreements. The fact
that the agreements may have been legally binding counts for
little if, as here, the parties understood that they would never
be enforced. As discussed at par. II-D-3, above, the right to
enforce payment may be meaningless if the parties do not expect
the recipient to repay.
This factor supports treating the LIIBV advances to
petitioners as equity.
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