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Petitioners point out that the balance sheets on Cabana
Boy’s tax returns show that shareholder loans decreased by
$253,943 from the beginning to the end of 1986 and contend that
this shows that Cabana Boy repaid that amount in 1986. We
disagree. Tax returns do not establish the truth of the facts
stated therein. See Lawinger v. Commissioner, 103 T.C. 428, 438
(1994); Wilkinson v. Commissioner, 71 T.C. 633, 639 (1979). This
factor favors respondent.
7. Thin Capitalization
Thin capitalization (i.e., a high ratio of debt to equity)
generally suggests that an advance to a closely held corporation
is a capital contribution. See Hardman v. United States, 827
F.2d 1409, 1414 (9th Cir. 1987); Electronic Modules Corp. v.
United States, 695 F.2d 1367, 1370 (Fed. Cir. 1982); Estate of
Mixon v. United States, supra at 408. Thin capitalization is a
significant factor because it reflects the extent to which
creditors are shielded against business losses and declines in
property values. See Hardman v. United States, supra.
Cabana Boy's 1987 and 1988 unaudited financial statements
show the following:
Year Liabilities Equity
1987 $887,937 ($204,556)
1988 954,758 (315,821)
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