- 16 -
supra at 696. Had the corporation actually paid him interest,
Mr. Wright would have received the exact same interest, or
compensation for the use of his money, as he was required to pay
to Draper Bank on its related mortgage. However, Mr. Wright’s
purported loan to the corporation was a much riskier investment
than the Draper Bank mortgage because it was unsecured and thus
logically would have commanded a higher interest rate in the
market to compensate Mr. Wright adequately for the increased
risk. Mr. Wright could have gained no economic advantage from
the nominal interest he would have received from the corporation
on the second note, which supports respondent’s argument that the
second note was a contribution of risk capital to the corporation
and not evidence of true indebtedness.
Finally, no interest payments were ever made to Mr. Wright,
and no interest was accrued with regard to any alleged loans. A
purported lender who does not insist on interest payments is
considered to be interested in the future earnings of the
corporation and takes the investment risk of a contributor to
capital, rather than that of a true lender. Segel v.
Commissioner, supra at 833. A disinterested lender in an
arm’s-length transaction would insist on interest accruals and
payments. A disinterested lender would also insist on
memorializing the loan and its terms in a formal promissory note,
none of which exist to corroborate the alleged loans recorded in
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