Victor I. Rosenberg and Deborah I. Rosenberg - Page 15




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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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