- 37 -
at 604 (citing United States v. Henderson, 375 F.2d 36, 40 (5th
Cir. 1967)).
In its reply brief, petitioner maintains that G�nther had a
debt-to-equity ratio of 3.4:1 as of May 31, 1991.23 Petitioner
did not explain precisely how it calculated the debt-to-equity
ratio, nor did petitioner present any argument regarding the
proper method for calculating the ratio.24 Petitioner also
failed to explain why the debt-to-equity ratio it calculated as
of May 31, 1991, supported its position that G�nther was
adequately capitalized during each of the taxable years at issue
here.
The failures identified above, combined with our review of
evidence in the record, lead us to conclude petitioner has failed
to prove that the capitalization of G�nther was adequate to meet
its reasonably foreseeable business needs. There is certainly
ample evidence in the record from which an inference can be drawn
that G�nther’s capitalization was inadequate. Petitioner’s large
23Petitioner apparently calculated the ratio by dividing
G�nther’s total long-term liabilities of $4,782,637 as of May 31,
1991, by total stockholder’s investment of $1,405,422.
Petitioner’s method of calculating the debt-to-equity ratio
ignores approximately 80 percent of the total liabilities
outstanding as of May 31, 1991, and determines G�nther’s equity
based upon the book value of G�nther’s assets.
24For example, in some cases, courts, including this Court,
have used the fair market values of assets rather than their book
values to calculate debt-to-equity ratios. E.g., Kraft Foods Co.
v. Commissioner, 232 F.2d 118 (2d Cir. 1956), revg. 21 T.C. 513
(1954); Mason-Dixon Sand & Gravel Co. v. Commissioner, T.C. Memo.
1961-259.
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