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8. The Ability of the Corporation To Obtain Credit From Outside
Sources
If a party receiving an advance can borrow funds from
another lender in an arm’s-length transaction on similar terms,
the advance may appear to be debt. See Electronic Modules Corp.
v. United States, 695 F.2d 1367, 1370 (Fed. Cir. 1982); Estate of
Mixon v. Commissioner, supra at 410. This factor is strongest
for petitioners. At trial, the chief financial officer of SEKO
testified that SEKO would have made the loans to TLC, up to the
$90,000 that was actually advanced. He spoke of the industry
norm of thin capitalization and of the practice of advancing
funds to companies losing money for a certain period of time.
Though the independent contractor agreement addresses guaranties,
he testified that no personal guaranties were required on the
notes to the contractors.
If J&J had advanced the funds in the exact same manner that
SEKO advanced funds to its independent contractors, this factor
would have had more probative value in petitioners’ favor. In
its loan agreement, SEKO arranges to withhold 10 percent of any
commission payment due to the independent contractor. By doing
so, the independent contractor is not given a choice of which
creditor to pay. The note also establishes a termination date by
which time the note must be paid. These two important factors
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