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6. Status Relative to Other Creditors
Whether an advance is subordinated to obligations to other
creditors bears on whether the taxpayer advancing funds was
acting as a creditor or an investor. Estate of Mixon v. United
States, 464 F.2d at 406. In addition, “Failure to demand timely
repayment effectively subordinates the intercompany debt to the
rights of other creditors who receive payment in the interim.”
Am. Offshore, Inc. v. Commissioner, supra at 603 (citing
Inductotherm Indus., Inc. v. Commissioner, T.C. Memo. 1984-281,
affd. without published opinion 770 F.2d 1071 (3d Cir. 1985)).
Petitioner acknowledges that Cap Corp. used a large portion
of petitioner’s advances to make interest payments to Cap Corp.’s
third-party creditors. Effectively, petitioner subordinated its
Cap Corp. advances for the benefit of these third-party creditors
in three ways. First, petitioner advanced $443,657 to Cap Corp.
on October 31 and November 30, 1996, and then on December 2,
1996, participated in the debt conversion transaction relieving
Cap Corp. of $2.259 million in advances. Second, petitioner
agreed to have the remaining $500,000 of advances rolled over
into the December 1, 1996, promissory note. Finally, petitioner
advanced an additional $1.257 million to Cap Corp. during 1997,
knowing that (1) after December 2, 1996, Cap Corp. remained
insolvent, (2) a significant portion of the funds furnished in
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