- 9 -
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.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Next
Last modified: May 25, 2011