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Technically, petitioner had a right to enforce payment
pursuant to the terms set forth in the January 1, 1995, and
December 1, 1996, promissory notes. In actuality, as discussed
above in connection with the prior three factors, payment of the
note principal and interest depended wholly on Cap Corp.’s
success.
This factor supports petitioner but is outweighed by other
attendant circumstances making uncertain Cap Corp.’s actual
payment of the note principal and interest to petitioner.
5. Participation in Management
The right to participate in the management of a business by
the entity advancing funds demonstrates that the advance may not
have been bona fide debt and instead was intended as an equity
investment. Am. Offshore, Inc. v. Commissioner, 97 T.C. 579, 603
(1991).
From 1995 through December 2, 1996, Crispin and Koehler
continued to manage Cap Corp. in the same manner as before 1995.
Koehler was in charge of Cap Corp.’s day-to-day operations, but
he would consult with Crispin at least weekly. After the
December 2, 1996, debt conversion, Crispin took over Cap Corp.’s
day-to-day operations.
This factor is neutral with respect to petitioner’s advances
during 1995 and 1996. It favors respondent with respect to
petitioner’s advances during 1997.
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