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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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