- 15 -
here are identical, and the lack of true bargaining between the
parties prevents us from accepting the form of the instrument
without an inquiry into the economic reality of the transaction.
See Fin Hay Realty Co. v. United States, supra at 697.
Second, when a corporation receives financing that it could
not acquire on similar terms from a commercial lender, the
character of that financing may be considered equity, not debt.
Id.; Segel v. Commissioner, supra at 828-829. Attached to the
second note is a mortgage from Draper Bank for the same principal
amount as the second note and with terms identical to it, except
that the mortgage has a stated maturity date and is secured by
the underlying realty. Regarding the relationship between the
second note and the mortgage document, Mr. Wright testified at
trial:
Later on, when my funds were depleted and I wasn’t
able to loan the corporation money, I then approached
commercial lending institutions who, because of the
number of years that I’ve been in the business and had
established a track record, they were willing to loan
me personally funds that I then loaned to the
corporation.
Comparing the second note and the related mortgage document, the
second note had no stated maturity date and was not secured,
which put Mr. Wright in a riskier position than Draper Bank.
Draper Bank, as a disinterested lender, provided the loan to
Mr. Wright for a fixed maturity date and required collateral as
security for repayment. See Fin Hay Realty Co. v. United States,
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011