- 71 -
supra, did not involve the start of an operation; it involved
advances to a bank that had suffered a large embezzlement loss.
Courts consider capital costs other than costs to start a
business in deciding whether a corporation is inadequately
capitalized. E.g., Plantation Patterns, Inc. v. Commissioner,
462 F.2d at 722; Tyler v. Tomlinson, 414 F.2d at 848-850; C.M.
Gooch Lumber Sales Co. v. Commissioner, 49 T.C. 649, 657 (1968);
Foresun, Inc. v. Commissioner, 41 T.C. at 717.
d. Debt to Equity Ratios of LTI and LII as Guarantors
Petitioners contend that we should take into account LTI's
and LII's debt to equity ratios because they were guarantors.
Even if we agreed, it would not affect our analysis. LTI's debt
to equity ratios were 2.26 for 1986, 5.78 for 1987, and 5.63 for
1988. LTI's debt to equity ratio averaged 4.56 and exceeded 2 to
1 for each of the years in issue. LII's debt to equity ratios
were .67 for 1986, 3.54 for 1987, and 8.43 for 1988. LII's debt
to equity ratio averaged 4.21 and exceeded 2 to 1 for the last 2
of the 3 years in issue. LTI's and LII's debt to equity ratios
generally worsened each year in issue.
Petitioners point out that Michael J. Kennelly (Kennelly),
petitioners' accounting expert, stated that LTI's and LII's debt
to equity ratios were acceptable. However, he used incorrect
assumptions in his debt to equity ratio calculations. Kennelly
relied on Poppei's conclusions of value. We are not persuaded by
Poppei's conclusions. Poppei unrealistically assumed that
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