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encumbered by delinquent debt on the Gandy’s bonds. Petitioner
allegedly relied upon uncertain future earnings for repayment and
generally insisted upon no fixed schedule for repayment. We are
unpersuaded that any unrelated third party would have made loans
to Gandy’s on these terms and in these circumstances. Indeed,
Gandy’s controller testified that when petitioner made the
advances, Gandy’s could not have obtained financing from any
other financial institution.14
This factor weighs toward equity.
12. Extent To Which the Advances Were Used To Acquire
Capital Assets
The use of a shareholder’s advances to pay day-to-day
operating expenses, rather than to acquire capital assets, tends
to indicate that the advances are bona fide indebtedness. See
Stinnett’s Pontiac Serv., Inc. v. Commissioner, supra at 639;
Estate of Mixon v. United States, 464 F.2d at 410. Gandy’s used
the advances as working capital to meet day-to-day operating
expenses.
This factor weighs toward debt.
14 In support of its argument that Gandy’s could obtain
financing from other sources, petitioner cites the controller’s
testimony that during 1991 and 1992, Gandy’s factored its
accounts receivable with a factoring company. This testimony
does not establish, however, that the factoring company would
have made unsecured loans to Gandy’s on terms similar to those
that pertained to petitioner’s advances.
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