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Cabana Boy’s debt-to-equity ratios for 1987 and 1988 were
extremely high because shareholders' equity was negative.2 See
Dunmire v. Commissioner, T.C. Memo. 1981-372; Steiner v.
Commissioner, T.C. Memo. 1981-212, affd. without published
opinion 688 F.2d 825 (3d Cir. 1982).
Petitioners contend that the debt-to-equity computations
should not include the $750,000 loan from R.G. Capital which
petitioners guaranteed and repaid. However, excluding the
$750,000 would not change our analysis because reducing Cabana
Boy’s liability by $750,000 does not change the fact that
shareholders’ equity was negative in 1987, and thus the debt-to-
equity ratio was very high. This factor favors respondent.
8. Third Party Loans
If the party receiving an advance can borrow funds in an
arm's-length transaction on similar terms, the advances may
appear to be debt. See Electronic Modules Corp. v. United
States, supra at 1370; Estate of Mixon v. United States, supra at
410. Cabana Boy borrowed $750,000 from R.G. Capital in 1987.
Petitioners personally guaranteed the loan. The loan document is
not in evidence. Petitioners have not shown that the terms of
the R.G. Capital loan are like the terms of their advances.
2 A meaningful debt-to-equity ratio cannot be computed for
1987 and 1988 because the owners have negative equity in those
years. See Dunmire v. Commissioner, T.C. Memo. 1981-372.
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