Cerand & Company, Inc. - Page 9




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          the three entities’ businesses.  Moreover, the advances made by             
          petitioner were completely dependent upon the success of startup            
          companies, none of which had prior business history, security,              
          assets, or other guaranties of repayment.  And finally,                     
          petitioner’s sister corporations repaid only a small percentage             
          of the advances.                                                            
           As we noted in Cerand I, some of the factors usually                       
          considered by lenders such as capitalization, risk, the                     
          availability of financing from outside sources, and the use to              
          which advances are put can help to identify whether the                     
          transaction was within the realm of economic reality.  “[T]he               
          touchstone of economic reality is whether an outside lender would           
          have made the payments in the same form and on the same terms.”             
          Segel v. Commissioner, 89 T.C. 816, 828 (1987).  Here, petitioner           
          accrued and reported a relatively small percentage of the                   
          interest that would have accrued if the advances were truly debt.           
          No interest was paid to petitioner by the sister corporations.              
          Instead, the accruals were rolled over annually into a note                 
          receivable.  Even if the $175,662 of interest reported by                   
          petitioner had been paid to it by the sister corporations, the              
          amount of interest that was accrued and reported does not comport           
          with economic reality in the context of a creditor-debtor                   
          relationship.                                                               








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