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Cap Corp. would not have been able to obtain similar loans
from an outside lending institution. Petitioner acknowledges
that: (1) Cap Corp. was insolvent from 1995 through 1997 and
needed funds from petitioner to pay its operating expenses and
those of its subsidiaries, including substantial interest
payments due Cap Corp.’s third-party creditors; (2) Cap Corp.
would have failed long before 1999 without the advances in
controversy; and (3) Cap Corp., during 1995 and 1996, lacked
tangible assets to serve as security and/or a repayment source
for loans. By October 1996 Crispin and Koehler realized Cap
Corp. was bankrupt, with liabilities exceeding assets by several
multiples. Even after the December 2, 1996, debt conversion, Cap
Corp.’s insolvency problems continued and its potential earnings
base declined dramatically.
This factor favors respondent.
C. Conclusion and Holdings
After considering the above factors, we hold that
petitioner’s advances to Cap Corp. are not to be treated as bona
fide debt for tax purposes. Those advances, instead, constituted
equity in Cap Corp.
On brief, however, petitioner argues that it is entitled to
ordinary deductions irrespective of whether the advances are
classified as debt or equity. Petitioner argues that, under
certain circumstances, courts have allowed taxpayers an ordinary
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