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respondent points out that only petitioner and no other
shareholder signed the notes, and no efforts were made to collect
matured notes. Petitioner counters that he was given authority
and consent by the other shareholders. Petitioner also points
out that the fact that petitioner signed all the notes does not
link the advances to petitioner’s capital investment in Snacks.
Petitioner also explains that the failure to enforce collection
on mature notes was not due to a legal inability, but instead to
the knowledge that Snacks was not in a position to pay. In
addition, petitioner points out that Snacks repaid K&H $300,000
when funds became available because of a transaction with a
foreign licensee. That repayment, petitioner contends, is “clear
evidence” of debt and not equity.
Respondent also argues that the advances were used to pay
the day-to-day operating expenses in a setting where Snacks had
not been shown capable of generating profit. This aspect,
respondent contends, means that the repayment advances are placed
at the “risk of the business”, meaning, ostensibly, that the
advances represent capital and not debt. Petitioner has shown
otherwise. At the time petitioner paid $120,000 for share
holdings in Snacks, a prototype of the vending machine existed.
There was active development of the product and its marketplace
throughout the period under consideration. After petitioner
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Last modified: May 25, 2011