Indmar Products Co., Inc. - Page 13

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          outweigh the factors in favor of characterizing the transfers as            
          debt (e.g., petitioner reported the payments on its Federal                 
          income tax returns as interest expense, external financing was              
          available, petitioner was adequately capitalized, the transfers             
          were not subordinated to all creditors, and the Rowes did not               
          make the transfers in proportion to their respective equity                 
          holdings).  Moreover, petitioner failed to establish that, at the           
          time the transfers were made, it had the requisite unconditional            
          and legal obligation to repay the Rowes (e.g., the transfers were           
          not documented).  Thus, we conclude that the Rowes’ transfers               
          were equity.  Accordingly, petitioner is not entitled to an                 
          interest expense deduction relating to the years in issue.                  
               Respondent also determined that petitioner is liable for a             
          section 6662(a) accuracy-related penalty.  The penalty applies to           
          the portion of petitioner's underpayment that is attributable to            
          a substantial understatement of income tax.  Sec. 6662(b)(2).               
          Respondent established that petitioner understated its income tax           
          liability, and thus, respondent has met his burden of production,           
          pursuant to section 7491(c).  Petitioner, however, failed to                
          address this issue on brief and did not present any credible                
          evidence to establish that it acted in good faith or that there             
          was reasonable cause for claiming the interest expense                      
          deductions.  Accordingly, the accuracy-related penalty is                   
          applicable to the underpayment attributable to the stockholder              

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