- 12 -
Thus, the transactions between petitioner and the Rowes did not
take the same form as transactions between unrelated parties.
IV. The Roth Steel Test
In addition to the transfers not being arm’s-length
transactions, the 11-factor test set forth in Roth Steel Tube Co.
v. Commissioner, 800 F.2d 625 (6th Cir. 1986), establishes that
the transfers were equity. First, petitioner did not pay any
formal dividends. Jaques v. Commissioner, 935 F.2d 104, 106 (6th
Cir. 1991), affg. T.C. Memo. 1989-673. Second, pursuant to 12
consecutive years of waivers, there was no fixed maturity date or
fixed obligation to repay. Roth Steel Tube Co. v. Commissioner,
supra at 631; Jaques v. Commissioner, supra at 108 (stating that
a taxpayer’s failing to repay debt within a reasonable time and
making “sporadic” principal payments are factors that weigh in
favor of equity). Third, Mr. Rowe testified that petitioner was
expected to make a profit and that repayment “has to come from
corporate profits or else the company couldn’t pay for it.” Roth
Steel Tube Co. v. Commissioner, supra at 631 (stating “An
expectation of repayment solely from corporate earnings is not
indicative of bona fide debt regardless of its reasonableness.”
(citing Lane v. United States, 742 F.2d 1311, 1314 (11th Cir.
1984))). Fourth, the transfers were unsecured. Roth Steel Tube
Co. v. Commissioner, supra at 631. Finally, petitioner never
established a sinking fund. Id. at 632. These factors certainly
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