- 19 -
determine whether there is an identity of interest between the
two positions. See American Offshore, Inc. v. Commissioner,
supra at 604-605. If stockholders’ advances to a corporation are
in substantially the same proportion as their equity ownership in
the corporation, it tends to demonstrate that the advances are
more in the nature of equity. See Estate of Mixon v. United
States, supra at 409. “On the other hand, a sharply
disproportionate ratio between a stockholder’s percentage
stockholdings and debt is strongly indicative” that the alleged
debt is bona fide. American Offshore, Inc. v. Commissioner, 97
T.C. at 604.
In this case, Mr. Magness undertook the Corbin project
ostensibly as a sole proprietor. When petitioner advanced the
funds to Mr. Magness, petitioner had no existing ownership
interest in the project. Although we view the involvement of
petitioner in the Corbin project as being more in the nature of a
joint venture, the identity of interest usually examined by this
factor simply does not exist in this case. Consequently, we do
not rely upon or apply this factor in making our analysis.
10. Payment of Interest Only From Profits
“This factor is essentially the same as the third factor,
‘the source of the payments.’” Hardman v. United States, 827
F.2d 1409, 1414 (9th Cir. 1987). It focuses, however, on how the
parties to the alleged debt treated interest. As we have stated,
Page: Previous 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 NextLast modified: May 25, 2011