- 9 -
creditor relationship. Litton Bus. Sys., Inc. v. Commissioner,
61 T.C. 367, 377 (1973).
Of the 10 factors recognized and considered in In re Uneco,
supra, by the Court of Appeals for the Eighth Circuit (the Court
to which an appeal of this case lies), we discuss and apply below
those factors that are relevant to the facts of this case.3
Thin or Adequate Capitalization
No specific ratio of debt to equity is determinative as to
whether a corporation is adequately capitalized. 2554-58 Creston
Corp. v. Commissioner, 40 T.C. 932, 937 n.3 (1963).
In spite of petitioner’s initial debt-to-equity ratio of
26:1, prior to startup of petitioner, petitioner’s officers and
directors understood petitioner’s business and the plastics
manufacturing industry and reasonably projected that petitioner
would be successful. As a result of revenues quickly generated
by its operations, petitioner’s debt-to-equity ratio was reduced
in just over 3 years to 4:1. This reduction indicates to us, in
this case, that petitioner was adequately capitalized from its
inception.
3 We omit a discussion of whether a sinking fund was
established to retire the debenture notes. This factor was not
addressed by either party. Our discussion of the risk factor
involves a number of the In re Uneco, Inc., 532 F.2d 1204 (8th
Cir. 1976), factors.
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 Next
Last modified: May 25, 2011