- 14 -
d. The Source of Repayment and the Ability To Repay
Respondent argues that petitioners had no ability to repay
the transfers, and this indicium of debt is thereby lacking. The
monthly installments, including interest, for Brian's 1992
"loans" totaled $4,405.74. In 1992 through 1994, Brian received
wages, additional income, and interest income totaling $14,307,
$45,364, and $51,291, respectively. Brian testified that he was
aware of the fact that the 1992 notes required monthly payments
totaling approximately $52,000 a year. He also testified that he
entered into the transactions knowing that his wages for 1992
were only $14,000. The monthly installments, including interest,
for Wayne's 1992 and 1993 "loans" totaled $13,623.08. In 1992
through 1994, Wayne received wages, interest and dividend income
totaling $13,439, $45,359, and $57,352, respectively.
Petitioners' inability, ab initio, to meet their contractual
obligation to service these "loans" is evidence that petitioners
had no intention of treating the transactions as bona fide debt.
We also note that Wayne's testimony that his repayment of the
"loans" was contingent on the future success of Erie Industries
supports our finding that Wayne did not intend to treat the
transfers as bona fide debt. This indicium supports a finding
that the transactions did not create bona fide debt. Cf. Fuller
v. Commissioner, T.C. Memo. 1980-370 (taxpayers submitted
evidence that their net worth substantially exceeded the sum of
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Next
Last modified: May 25, 2011