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debts of petitioner, payments on the debenture notes depended
solely on future earnings of petitioner which put the debenture
funds at an equal amount of risk as petitioner’s equity.
Reliance, however, upon future earnings for payment of a
purported debt generally does not cause the funds received by a
corporation to be treated as equity. See J.S. Biritz Constr. Co.
v. Commissioner, 387 F.2d 451, 458-459 (8th Cir. 1967), revg.
T.C. Memo. 1966-227.
Third-Party Loans
Funds are more likely to be treated as debt if at the time
the funds were received the corporation had credit available from
outside sources. Am. Offshore, Inc. v. Commissioner, supra at
605 (citing Estate of Mixon v. United States, supra at 410).
The evidence indicates that petitioner was successful in
obtaining secured loans from outside creditors, and at no time
was petitioner refused a loan from a third party.
Management Participation
Funds received by a corporation will be more likely treated
as equity if, as a result of such receipt, the person
transferring the funds had a right to participate in the
management of the corporation. Am. Offshore, Inc. v.
Commissioner, supra at 603.
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