- 74 -
This factor is neutral.22
10. Source of Interest Payments, i.e., Whether the
Recipient of the Funds Pays Interest From Earnings
Payment of interest by the recipient of an advance suggests
that a transfer is debt. Estate of Mixon v. United States,
supra.
Petitioners contend that they paid all of the interest due
to LIIBV in the amounts and on the dates required by the loan
agreements and promissory notes, and that they paid the interest
at issue. We disagree. LIIBV usually paid one of the three
operating companies (Transit, Tree, and LWSI) on the same day and
often in the same amount of the payments that LIIBV had received
that day. Petitioners' payments to LIIBV did not change
petitioners' financial position because LIIBV immediately
returned the vast majority of funds to petitioners as interest
reinvestment loans. In substance, petitioners paid interest to
LIIBV at most sporadically because funds flowed in a carefully
orchestrated circle.23
22 We could also conclude that this factor supports treating
the LIIBV advances to petitioners as equity because LIIBV and
petitioners are indirectly held by LTL, and thus 100 percent of
the advances came from petitioners' 100-percent owners. This
suggests that LIIBV and petitioners had an identity of interest.
Harmont Plaza, Inc. v. Commissioner, 64 T.C. 632, 645 (1975),
affd. 549 F.2d 414 (6th Cir. 1977); see Rickey v. United States,
592 F.2d 1251, 1257-1258 (5th Cir. 1979) (discussing attribution
rules of sec. 318).
23 Respondent relied on these facts in arguing that sec.
267(a)(3) applies. Petitioners did not dispute respondent's
contention that there was a circular flow of funds.
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