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$649,000 ordinary loss deduction claimed by petitioner for 1993
was not allowable.
For its 1990, 1991, 1992, and 1993 fiscal years, K&H paid
interest on indebtedness incurred to purchase a yacht in the
amounts of $20,659, $20,280, $17,515, and $11,950, respectively.
OPINION
The principal and threshold question for our consideration
is whether the advances from K&H to Snacks were debt or equity,
thereby determining the proper deduction, if any, allowed to
petitioner as sole shareholder of K&H, a pass-thru entity. If we
find that the advances are debt, we must consider whether the
debt was business debt and became worthless as claimed. In the
setting of this case, the answer to the debt versus equity
question will decide whether the claimed losses are ordinary or
capital, if allowable. Some of the factors that we consider here
in deciding whether advances are debt or equity include: The
existence of debt instruments; the parties’ intent and their
representations of the advances; the existence of fixed maturity
dates; rights to enforce payment; whether the advances enhanced
participation in the debtor’s management; the status of the
advances relative to other creditors; whether the borrowing
entity is thinly capitalized; repayment activity; and the type of
expenditures made with the advances. See, e.g., Dixie Dairies
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