- 82 -
U.S. 521 (1946). We disagree. The Court of Appeals for the
Seventh Circuit held in Commissioner v. John Kelley Co., supra,
that the fact that the taxpayers did not exchange cash for
debentures is a factor indicating that an advance is equity. Id.
at 467. However, the Court of Appeals for the Seventh Circuit
did not state that the converse is true; i.e., that if the
recipient of funds received any cash, the transaction is a loan.
The fact that LIIBV transferred cash to petitioners is not
convincing evidence that the advances were debt.
This factor is neutral.
2. Reasonable Expectation of Repayment
A reasonable expectation of repayment by the provider of an
advance when the advance is made suggests that the advance is
debt. Gilbert v. Commissioner, 248 F.2d 399, 406 (2d Cir. 1957),
remanding T.C. Memo. 1956-137; C.M. Gooch Lumber Sales Co. v.
Commissioner, supra at 656; Nestle Holdings, Inc. v.
Commissioner, T.C. Memo. 1995-441. Petitioners contend that
LIIBV reasonably expected petitioners to repay all of the loans
based on their financial conditions. We disagree. LIIBV's
directors did not expect to be repaid or intend to request
repayment.
This factor suggests treating the LIIBV advances to
petitioners as equity.
3. Absence of Conversion Rights
Petitioners point out that they had no right to convert the
creditor's loans to stock of the debtor, and contend that this
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