- 106 -
that a purported lender expects to be paid out of future earnings
or through an increased market value of its equity interest. Id.
at 605 (citing Curry v. United States, 396 F.2d 630, 634 (5th
Cir. 1968)).
Although the Cap Corp. promissory notes provided that
accruals of interest be added to the outstanding balance, Cap
Corp. did not make and was not financially capable of making
interest payments after August 1995. Payment of accrued interest
depended entirely on profits that Cap Corp. did not have and was
not likely to earn in the future.
This factor favors respondent.
11. Ability To Obtain Loans From Outside Lending
Institutions
“[T]he touchstone of economic reality is whether an outside
lender would have made the payments in the same form and on the
same terms.” Segel v. Commissioner, 89 T.C. 816, 828 (1987)
(citing Scriptomatic, Inc. v. United States, 555 F.2d 364, 367
(3d Cir. 1977)). A corporation’s ability to borrow from outside
lending institutions gives the transaction the appearance of a
bona fide debt and indicates that the purported creditor acted in
the same manner toward the corporation as ordinary reasonable
creditors would have acted. Hardman v. United States, supra
(citing Estate of Mixon v. United States, supra at 410).
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