- 102 -
Although the advances were treated as debt on the books,
neither Cap Corp. nor petitioner intended, or reasonably could
have intended, the advances to be bona fide debt. Petitioner
made the advances to keep Cap Corp. from defaulting upon its
promissory notes to third-party creditors and to pay Cap Corp.’s
operating expenses. During 1995 through most of 1996, petitioner
made the advances knowing they were risky. During late 1996 and
1997, petitioner knew that it would not recover most, if any, of
the funds advanced to Cap Corp., but it continued to inject funds
into Cap Corp. Petitioner knew its repayment prospects with
respect to these later advances were highly uncertain. We
conclude that neither petitioner nor Cap Corp. genuinely intended
the advances to be bona fide debt or reasonably intended the
advances to be repaid. See id. at 1333-1334.
This factor favors respondent.
8. Thin or Adequate Capitalization
The purpose of examining the debt-to-equity ratio in
characterizing an advance is to determine whether a corporation
is so thinly capitalized that it would be unable to repay an
advance. Such an advance would be indicative of venture capital
rather than a loan. Bauer v. Commissioner, 748 F.2d at 1369.
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