HJ Builders, Inc. - Page 13

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          other similar documents to substantiate their claim that the                
          $72,000 in miscellaneous checks paid to Mr. Wright over the                 
          course of 2001 was in repayment of loans from Mr. Wright to the             
          corporation.  See Meier v. Commissioner, T.C. Memo. 2003-94.                
          Petitioners have not persuaded us that any loans from Mr. Wright            
          to HJ Builders existed during the years in issue, and thus we               
          must conclude that the cash disbursements to Mr. Wright in 2001             
          were not made in repayment of such alleged loans.                           
               Even if petitioners had presented consistent and credible              
          evidence that the cash payments to Mr. Wright were in repayment             
          of prior loans to the corporation, we would conclude, based on              
          the facts and circumstances of these cases, that those prior                
          loans were in reality equity contributions and not debt.                    
               Claims of a debt relationship in a transaction between                 
          controlling shareholders and their closely held corporations                
          warrant heightened scrutiny because, unlike the situation in an             
          arm’s-length transaction between unrelated parties, there is an             
          opportunity and often a motivation to have investments treated as           
          debt obligations rather than as capital contributions.  Fin Hay             
          Realty Co. v. United States, 398 F.2d 694, 696 (3d Cir. 1968);              
          Cuyuna Realty Co. v. United States, 180 Ct. Cl. 879, 883-884, 382           
          F.2d 298, 300-301 (1967).  When presented with the issue of                 
          whether a purported loan is debt or equity, the courts have                 
          generally weighed the following factors:                                    






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