Victor I. Rosenberg and Deborah I. Rosenberg - Page 16




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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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