T.C. Memo. 1998-232

UNITED STATES TAX COURT

LAIDLAW TRANSPORTATION, INC. AND SUBSIDIARIES, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

LAIDLAW INDUSTRIES, INC. & SUBSIDIARIES, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 9361-94, 9362-94. Filed June 30, 1998.

Robert H. Aland, Gregg D. Lemein, Mark A. Oates, Jeffrey M.

O'Donnell, John D. McDonald, and Taylor S. Reid, for petitioners.

Thomas R. Lamons, C. Glenn McLoughlin, and Brigham J.L.

Sanders, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

COLVIN, Judge: Respondent determined deficiencies in and

overpayments of petitioners' Federal income tax as follows:
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1 The following payments from LTI's and LII's subsidiaries

to LIIBV are in dispute:

 Payments to LIIBV from -- 

 Tax Year LTI's Subsidiaries LII's Subsidiaries Total 

Aug. 31, 1986 $2,439,773 $753,698 $3,193,471

Aug. 31, 1987 17,199,562 28,590,158 45,789,720

Dec. 31, 1987 --- 14,509,081 14,509,081

Aug. 31, 1988 70,023,187 --- 70,023,187

Total 89,662,522 43,852,937 133,515,459

2 Our use of terms such as "pay", "payment", "borrow",

"interest", "lend", and "loan" does not indicate our conclusion

about the substance of the transactions at issue.

Laidlaw Transportation, Inc. (LTI) and Subsidiaries

Year Deficiency Overpayment

1984 $108,575 $8,333

1985 3,178,717 0

1987 7,983,733 0

1988 17,747,370 181,801

Laidlaw Industries, Inc. (LII) and Subsidiaries

 Year Deficiency Overpayment

 1986 $96,383 -0-

 Aug. 1987 19,746,061 -0-

 Dec. 1987 6,828,291 -0-

Petitioners received $975,153,806 from a related Dutch

corporation, Laidlaw International Investments B.V. (LIIBV),

during the years in issue. Petitioners transferred $133,515,4591

to LIIBV in payments denominated as interest2 during those years. 

The issue for decision is whether the LIIBV advances to

petitioners were debt or equity, and thus whether petitioners may

deduct the $133,515,459 as interest for the years in issue. We
- 3 -

3 In light of our decision, we need not decide whether, as

respondent contends, some of the payments at issue here are not

deductible because of sec. 267.

hold that the LIIBV advances to petitioners were equity, and that

petitioners may not deduct the $133,515,459 as interest.3

We use the following abbreviations in this report:

BBC Barclays Bank of Canada LIIBV

Curacao

Laidlaw International

Investments B.V., Curacao

Branch

BFI Browning-Ferris

Industries, Inc.

LIL Laidlaw Investments Ltd.

Chase Chase Lincoln First Bank LTI Laidlaw Transportation,

Inc.

CP Canadian Pacific Ltd. LTL Laidlaw Transportation Ltd.

or Laidlaw, Inc.

FNBC First National Bank of

Chicago

LWSI Laidlaw Waste Systems, Inc.

GGCL Grey Goose Corporation

Ltd.

LWSL Laidlaw Waste Systems, Ltd.

Goose Grey Goose Holdings, Inc. Monroe Monroe Tree and Lawntender,

Inc.

GSX GSX Corporation RBC Royal Bank of Canada

LAC Laidlaw Acquisition Corp. TDB Toronto Dominion Bank

LESCAL Laidlaw Environmental

Services (California),

Inc.

Transit Travelways, Inc., Laidlaw

Transit, Inc., or Laidlaw

Transit (West), Inc.

LESI Laidlaw Environmental

Services, Inc.

Transit

Ltd.

Laidlaw Transit Ltd.

LHI Laidlaw Holdings, Inc. Tree Laidlaw Tree Service, Inc.

LIBL Laidlaw Investments

(Barbados) Ltd.

Waste 

Quebec

Laidlaw Waste Systems

Quebec Ltd.

LII Laidlaw Industries, Inc. WMI Waste Management, Inc.

LIIBV Laidlaw International

Investments B.V.
- 4 -

Unless otherwise indicated, section references are to the

Internal Revenue Code in effect for the years in issue and Rule

references are to the Tax Court Rules of Practice and Procedure.

TABLE OF CONTENTS

I. FINDINGS OF FACT ..................... 4

A. Petitioners ..................... 4

B. LTL ......................... 5

C. Growth of Petitioners and Their Subsidiaries ... 11

D. LIIBV ....................... 15

E. LTL's Purchase of GSX ............... 20

F. LTI's Centralized Cash Management Program (CCMP) . 24

G. The Advances at Issue ............... 25

H. Petitioners' Financial Condition ......... 44

I. Bank Loans . . . . . . . . . . . . . . . . . . . . 48

J. Comparison of Terms Governing Advances from LIIBV and

Bank Loans . . . . . . . . . . . . . . . . . . . . . 50

K. Audit of LTL by Canadian Tax Authorities. . . . . . 52

II. OPINION ........................ 52

A. Contentions of the Parties ............ 52

B. Loans vs. Capital Contributions .......... 53

C. Substance vs. Form ................ 54

D. The Mixon Factors ................. 58

E. Other Factors ................... 81

F. Conclusion .................... 83

I. FINDINGS OF FACT

Some of the facts have been stipulated and are so found.

A. Petitioners

Petitioners LTI and LII are U.S. corporations the principal

places of business of which were in Hurst, Texas, when they filed

their petitions. 

LTL, a Canadian corporation, owned all of the stock of LTI

during the years in issue. LTI was a holding company for U.S.
- 5 -

4 On Jan. 1, 1990, LTL changed its name to Laidlaw Inc. 

companies in the passenger and school bus transportation

businesses. LTI's consolidated group included Transit and Tree. 

LTI owned 76 to 79 percent of the stock of LII during the

years in issue and before December 16, 1987. The other LII stock

was publicly held. LII bought the publicly held stock on

December 16, 1987. After that date, LTI was the parent of the

U.S. consolidated group that included LII. LII was a holding

company for U.S. companies in the solid and (after October 1986)

hazardous waste services business, including LWSI. 

B. LTL

1. Michael George DeGroote (DeGroote)

DeGroote and his family moved from Belgium to Canada in 1948

when he was 14. In the 1950's, DeGroote started a construction

business in Elliot Lake, Canada. In 1959, he moved his business

to Sault Sainte Marie, Canada, and built sewers, roads, and

highways. 

In 1959, DeGroote bought all of the stock of Laidlaw Motor

Sales, Ltd., an Ontario, Canada, trucking corporation; Laidlaw

Motors, a retail truck parts business; and Hepburn Transport

Ltd., a Canadian trucking company. In 1966, Hepburn Transport

Ltd. merged with Laidlaw Motor Sales, Ltd., which later became

LTL.4 DeGroote was president and chairman of LTL from the time

it was formed until August 1, 1990. 
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2. Organization of the Laidlaw Entities in the Years in

Issue

As discussed in more detail in pars. I-B-3 and 4 and I-C,

below, LTL and its subsidiaries were organized as follows during

the years in issue:
- 7 -

5 GGCL owned all of Goose during the tax years ending Aug.

31, 1986, to Aug. 31, 1988. LTL owned 96 percent and Transit

Ltd. owned 4 percent of GGCL. LTL owned all of Transit Ltd., a

Canadian corporation. On July 4, 1988, Transit Ltd. merged with

Travelways Ltd., a Canadian corporation which was 100-percent

owned by LTL. The merged entity was Transit Ltd. 

a. Laidlaw Entities Before December 16, 1987

LTL

(Canada)

 100% 

 (95.6% direct; 100%

 4.4% indirect)5 

 GGCL

 (Canada)

 LIL

(Canada)

 100% 100% 100% 

 

Goose

 (U.S.)

LTI

(U.S.)

 PETITIONER

LIIBV

(Netherlands)

 

 20% 80% 100% 100% 

 

LHI

(U.S.)

Transit 

(U.S.)

Tree

(U.S.)

 Public 

 21% 75% 4% 100%

LII

(U.S.)

PETITIONER

Other

U.S.

Operating

Subsidiaries

 

 100%

LWSI

(U.S.)

 

 LESI 

 and Other

 U.S. Operating

 Subsidiaries
- 8 -

b. Laidlaw Entities After December 16, 1987

LTL

(Canada)

 100% 

 (95.6% direct; 100%

 4.4% indirect)

 GGLC

(Canada)

 LIL

(Canada)

 100% 100% 100% 

 

 

Goose

 (U.S.)

LTI

(U.S.)

 PETITIONER

LIIBV

(Netherlands)

 

 19% 81% 100% 100% 

 

LII

(U.S.)

 PETITIONER

Transit

(U.S.)

Tree

(U.S.)

 

 100% 100%

LWSI

(U.S.)

 

 Other

U.S. Operating

 Subsidiaries

 100%

 Other

 U.S. Operating

 Subsidiaries
- 9 -

3. Growth of LTL

From 1959 to 1969, LTL and its predecessors bought trucking

businesses in the United States and Canada. LTL bought Superior

Sanitation in 1969. LTL began to buy passenger bus service

businesses in Canada in 1973. LTL's subsidiaries entered the

solid waste services business in the United States in January

1978. LTL bought the largest operator of school buses in Canada

in 1979. In October 1980, LTL bought all of the stock of Theta

Systems, Inc. (TSI), which operated solid waste services

businesses in Indiana, Illinois, and Ohio. TSI changed its name

to LWSI. LWSI had subsidiaries active in the solid waste

business in North America. 

LTL's subsidiaries entered the passenger bus business in the

United States in September 1983. LTL sold its trucking business

in 1984. By the end of 1988, LTL and its subsidiaries were the

third largest solid and hazardous waste management services

company and the largest provider of school bus transportation

services in North America. 

LTL financed its expansion in the United States by lending

money and contributing capital to its subsidiaries in the United

States. Before 1969, LTL financed its growth primarily with its

own earnings and loans from banks and finance companies. LTL

first made a public offering of its stock in 1969. LTL raised
- 10 -

6 All references to "C$" are to Canadian dollars. All

references to "$" are to U.S. dollars.

C$1.5 million6 in 1969, which it used to repay bank debts and buy

more businesses. LTL stock was traded on stock exchanges in

Canada and the United States by August 31, 1988 (the end of LTL's

1988 tax year). 

LTL and its subsidiaries grew rapidly before and during the

years in issue. DeGroote acquired businesses that provided

trucking, solid waste services, and passenger and school bus

services. These businesses used heavy vehicles to transport

materials or people and needed governmental licenses or permits

to operate. DeGroote believed that the fastest way to expand in

these businesses was to buy small privately-held businesses which

had existing licenses and permits. 

4. LTL's Management Team

The core management team of the Laidlaw entities during the

years in issue consisted of DeGroote, Leslie W. Haworth

(Haworth), and Ivan R. Cairns (Cairns). Haworth became LTL's

senior financial officer in 1972 and later became senior vice

president for finance. Cairns became LTL's vice president,

general counsel, and secretary in 1981. He later became senior

vice president. Cairns and Haworth were DeGroote's two closest

advisors on acquisitions, financing, and other matters. They

were directors and officers of LTL and all of its subsidiaries

relevant to these cases before and during the years in issue.
- 11 -

During the years in issue, DeGroote was chairman of all of

the Laidlaw companies. DeGroote, Haworth, and Cairns were

directors and officers of LTL, LIL (LIIBV's parent which was

wholly owned by LTL), LIIBV, and petitioners. 

5. DeGroote's Sale of LTL Stock

DeGroote owned about 50.5 percent of the voting stock of LTL

during LTL's 1986 and 1987 tax years and until May 1988. 

Ownership of LTL's other voting stock was widely dispersed. In

May 1988, CP, a Canadian transportation conglomerate, bought 47.2

percent of the voting stock of LTL from DeGroote for C$499

million. 

C. Growth of Petitioners and Their Subsidiaries

DeGroote and his management team established LTL as the

controlling parent of several subsidiaries which included LIIBV,

LTI, LII, and their subsidiaries. See pars. I-B-2, 3, and 4,

above. 

1. LTI and Its Subsidiaries

In 1977, LTL formed LTI (a petitioner in these cases) to be

a holding company for LTL's U.S. subsidiaries. LTI, a Delaware

corporation, is an accrual basis taxpayer. LTL owned all of the

stock of LTI during the years in issue. LTI was the parent of an

affiliated group that filed consolidated returns during the years

in issue. 

During the years in issue, DeGroote, Haworth, Ronald S.

Murray (Murray), and Douglas R. Gowland (Gowland) were the
- 12 -

7 LTI sold all of the outstanding stock of Tree to an

unrelated buyer in October 1990 for $17.4 million. 

directors of LTI. DeGroote was president from November 20, 1984,

to December 10, 1987. Murray was vice president from November

30, 1984, to January 9, 1986. Haworth was vice president for

finance from November 30, 1984, to August 31, 1988. Cairns was

secretary from November 30, 1984, to December 10, 1987. Gowland

was senior vice president for solid waste services from December

11, 1986, to December 10, 1987. 

DeGroote, Haworth, and Gowland were directors of Tree from

May 27, 1987, to August 31, 1988. Officers of Tree from May 27,

1987, to August 31, 1988, included Gowland as chairman, Haworth

as vice president for finance, and Cairns as secretary.7 

DeGroote, Haworth, and Victor A. Webster (Webster) were

Transit's directors from January 10, 1985, to August 31, 1988. 

Transit's officers from January 10, 1985, to August 31, 1988,

included Webster as president, Haworth as vice president for

finance, and Cairns as secretary. DeGroote was chief executive

officer from December 10, 1987, to August 31, 1988. 

Through an acquisition company, on May 1, 1987, LTI paid $16

million to buy the stock of Monroe, a New York corporation, which

provided landscaping and tree services in New England. Monroe

changed its name to Laidlaw Tree Services, Inc. (Tree), on April

28, 1988. 
- 13 -

8 Unless otherwise indicated, references to "Transit"

include references to Travelways, Laidlaw Transit, Inc., Laidlaw

Transit (West), Inc., and Transit. 

On October 28, 1983, LTL formed Travelways, Inc.

(Travelways), a Delaware holding and operating corporation. 

Before September 1, 1987, Travelways owned all of Transit, a

holding and operating corporation formed under California law on

June 26, 1961, and all of LTI's passenger services subsidiaries. 

On September 1, 1987, Laidlaw Transit, Inc., changed its

name to Laidlaw Transit (West) Inc. (LTW). On November 5, 1987,

Travelways changed its name to Laidlaw Transit, Inc. (Transit).8

After the name changes, most of the Laidlaw U.S. east coast

passenger services subsidiaries were merged into Transit, and

most of the Laidlaw U.S. west coast passenger services

subsidiaries were merged into LTW. 

During the years in issue, Transit and its subsidiaries

provided passenger and school bus services in the United States. 

LTL and its subsidiaries were the largest provider of school

transportation services in North America. 

2. LII and Its Subsidiaries

a. LII

LTL formed LII (a petitioner in these cases) on March 24,

1981, as the holding company for LTL's U.S. and Canadian solid

waste services operations. LII is a Delaware corporation and an

accrual basis taxpayer. Before 1982, LTI owned 80 percent of the
- 14 -

stock of LII. LTL owned all of the stock of GGCL, a subsidiary

of which owned the other 20 percent of LII stock. 

On February 9, 1982, LTI and GGCL transferred their LII

stock to LHI, a Delaware corporation. The stock of LII was

publicly traded on the NASDAQ from 1982 to 1987. The public

owned 19 to 24 percent of the stock of LII from 1982 to 1987. 

During the years in issue, DeGroote, Haworth, Gowland, and

Murray (and others) were directors of LII. LII's presidents were

Murray from September 1 to October 8, 1985, and Gowland from

October 9, 1985, to August 31, 1988. Haworth was vice president

for finance from September 1, 1987, to August 31, 1988. Cairns

was secretary, vice president, and general counsel from September

1, 1985, to August 31, 1988. Harve A. Ferrill (Ferrill) was a

director of LII from 1982 to 1987. Ferrill had founded a waste

services company (TSI) that LTL bought in 1980. When LII went

public in 1982, DeGroote asked Ferrill to be a director. 

LHI merged into LII on December 31, 1987. 

b. LWSI

LII owned all of the stock of LWSI during the years in

issue. During the years in issue, LWSI owned all of the common

stock of LWSL, a Canadian corporation. LWSL owned all of the

common stock of Waste Quebec, a Canadian corporation. LWSL and

Waste Quebec were in the solid waste services business in Canada. 
- 15 -

LWSI's only directors from September 1, 1985, to August 31,

1988, were DeGroote, Gowland, and Haworth. LWSI's officers

included Gowland as president from October 2, 1986, to January 5,

1987, Haworth as vice president for finance from October 2, 1986,

to August 31, 1988, and Cairns as secretary from September 1,

1985, to August 31, 1988. 

D. LIIBV

1. Coopers & Lybrand's Plan

By the mid-1980's petitioners were competing intensely with

WMI and BFI to buy solid waste services businesses. In the

summer of 1985, DeGroote, Cairns, and Haworth asked Coopers &

Lybrand to develop a tax strategy for LTL to help petitioners

compete with WMI and BFI in buying U.S. companies. Coopers &

Lybrand also considered nontax factors. 

Coopers & Lybrand recommended that LTL form LIL as a whollyowned Canadian subsidiary, and then form LIIBV, a Netherlands

subsidiary of LIL to be funded by capital contributions and noninterest-bearing debt. Coopers & Lybrand said that under this

plan: (a) LTL could deduct interest it paid on funds it borrowed

to invest in LIL; (b) LIL could lend funds interest free to

LIIBV, which could advance funds to Laidlaw's U.S. subsidiaries

as interest-bearing debt; (c) the U.S. subsidiaries could deduct

the interest with no withholding tax liability under a

U.S./Netherlands treaty; and (d) the Laidlaw group would have

what Coopers & Lybrand called a "double deduction" of interest

expense (interest deduction in both Canada and the U.S.), with
- 16 -

9 From the time LIL was formed, LIL owned all of the stock

of LIBL, a Barbados corporation. 

10 LIL also received a dividend from LIIBV in February 1988. 

minimal income tax liabilities in The Netherlands, Canada, or the

United States.

2. Formation of LIL and LIIBV; Dutch Tax Rulings

On September 25, 1985, LTL formed LIL, a Canadian

corporation. LTL has always been the sole shareholder of LIL.9

LTL and its subsidiaries contributed equity to LIL which was its

sole source of funds during the years in issue.10

DeGroote, Haworth, and Cairns were directors of LIL from

September 25, 1985, to August 31, 1988. From September 25, 1985,

to August 31, 1988, DeGroote was president and Haworth was vice

president for finance. Cairns was vice president and secretary

from September 25, 1985, to December 10, 1987, and secretary from

December 10, 1987, to August 31, 1988. Jerry Pekaruk (Pekaruk)

was controller from September 25, 1985, to December 10, 1987. 

Robert E. Duncan (Duncan) was vice president from December 10,

1987, to August 31, 1988. Haworth supervised Pekaruk and Duncan.

On December 2, 1985, Coopers & Lybrand received the first of

several Dutch tax rulings that LIL's interest-free loans to LIIBV

would be treated as capital contributions rather than profits for

purposes of Dutch income and withholding taxes. 

On December 30, 1985, LIL formed LIIBV in The Netherlands as

a 100-percent owned subsidiary. LIIBV was a corporation for U.S.
- 17 -

11 During the taxable years in issue, LIIBV was a foreignrelated person with respect to Transit and LWSI within the

meaning of sec. 267(a)(3) and sec. 1.267(a)-3(b)(1), Income Tax

Regs. 

Federal income tax purposes.11 In February 1986, LIIBV opened

accounts with ABN Bank, New York. 

LIL owned all of the stock of LIIBV during the years in

issue. DeGroote was a director of LIIBV during the years in

issue. LIIBV had other directors, including Netherlands

residents. Haworth became a director of LIIBV after the years in

issue. 

On October 16, 1986, Haworth (using LTI letterhead) wrote

the following to Peter Deege, a director of LIIBV: 

I should advise you that at our Monday meetings we

wish to do the following:

1. Amend the loan agreements from B.V. to our U.S.

subsidiaries to provide with effect from September 1,

1986:

(a) All sums to be due on demand at interest

rates equal to ABN New York prime plus 2

percent, payable on the last business days of

each fiscal quarter.

(b) Remove all financial ratio covenants.

(c) Remove the "ceilings" so that no limits will

exist. All loans will be provided as

requested but subjected to availabilities of

B.V.'s funds.

(d) In the case of Laidlaw Transportation, Inc.'s

subsidiaries, there will be two loan accounts

established, one called principal account and

the other called reinvested interest account.

(e) To facilitate the quarterly and other changes

in loan amounts, all increases/decreases

would be entered on a grid promissory note. 

This system allows the lender to adjust the

promissory note automatically without issuing
- 18 -

a new note. It may not be available under

Dutch law in which case we shall amend to

suit your requirements.

I shall be bringing new loan agreements with me

prepared on the Grid Note Basis. 

2. Laidlaw Investments Limited ("LIL"), LIIBV's

parent, will sell a promissory note of U.S.

$124,812,613 payable by Laidlaw Waste Systems Inc. at

ABN prime plus 2 percent to LIIBV in exchange for a

combination of capital of LIIBV and an interest free

loan. The amount of capital that will be attributed to

one share has to be determined by you and Ron Unger

prior to Monday. This promissory note is dated October

14 and LIIBV will have to direct the borrower to pay

the interest accrued from October 14 to October 19 to

LIL.

Ron Unger may need to advise the Dutch tax

authorities of these transactions in advance. Please

confer with him. 

LIIBV carried out the instructions in Haworth's letter at

its board meeting on October 20, 1986. 

From February 4, 1986, to April 12, 1988, LIIBV's managing

directors met 12 times. DeGroote was present at four of the

meetings and voted by proxy at eight. Haworth was present at

three of those meetings and Cairns was present at two. 

LIL owned 100 percent of LIIBV. LIL's proxies at

shareholder meetings for LIIBV included specific instructions

about future transactions. 

Cairns and Haworth signed all of the loan agreements,

promissory notes, and assignments of transactions between LIIBV

and petitioners on behalf of petitioners. LTL significantly

influenced LIIBV's lending decisions and operations. 
- 19 -

3. LIIBV's Tax Status in The Netherlands

LIIBV kept books in The Netherlands in which it recorded its

lending and borrowing transactions, investments, capital

contributions, income, and expenses. LIIBV reported the payments

on its loans to Transit, LWSI, and Tree as interest income

subject to The Netherlands' income tax. LIIBV paid income tax to

The Netherlands in 1986, 1987, and 1988. 

LIIBV could claim benefits under the Convention for the

Avoidance of Double Taxation, Apr. 29, 1948, U.S.-Netherlands,

art. VIII(1), 62 Stat. 1778, for all of the interest paid to it

by U.S. persons, including petitioners. 

Neither LTL nor any of the other Laidlaw companies asked to

borrow money from any unrelated commercial lenders to replace the

money the Laidlaw companies received from LIIBV. LTL did not

guarantee repayment of loans LIIBV made to petitioners or the

U.S. companies. However, LTL guaranteed repayment of loans by

commercial lenders to petitioners and the U.S. companies. 

4. LIIBV Curaçao

In October 1987, LIIBV established a branch office in

Curaçao, Netherlands Antilles (LIIBV Curaçao), to reduce

Netherlands income tax on the interest payments that LIIBV

received from Transit, LWSI, and Tree. LIIBV Curaçao kept a set

of its books and records in Netherlands Antilles. 

On February 17, 1988, LIIBV Curaçao hired G.A.F. Schrils

(Schrils), a resident of Netherlands Antilles, as its branch

manager. Schrils reported to LIIBV's directors in Amsterdam. 
- 20 -

12 GSX's parent had agreed to reduce the price by

C$24,743,000 because Coopers & Lybrand identified problems with

GSX's operations. 

E. LTL's Purchase of GSX

1. The Agreement To Buy GSX

LTL bought the stock of GSX for $349,812,613 in 1986.12

DeGroote and Haworth asked three investment banks if they wanted

to provide long-term financing for LII to buy GSX. Dean Witter,

Bear Stearns, and Donaldson, Lufkin & Jenrette each gave LII

tentative proposals. Each investment bank said that the GSX

acquisition could be financed through a combination of equity (or

convertible debt), subordinated debt, and bank loans. The

investment banks based their proposals in part on information

about GSX's finances that LTL later found to be unreliable. Each

proposal would have required petitioners to publicly issue stock

or debt. However, petitioners could not issue equity or debt

because GSX did not have separate audited financial statements. 

Haworth opposed a public offering at that time. 

LTL and LII rejected the investment banks' proposals

because: (a) GSX did not have separate audited financial

statements; (b) equity or convertible debt would dilute LTI's

interests in LII; and (c) debt from commercial lenders could not

be secured on terms as favorable as debt from LIIBV. 

Ferrill (identified at par. I-C-2-a, above) was a member of

a special committee for LII's board of directors which was

considering the investment banks' proposals. He relied on

Haworth's judgment in deciding that LII should reject the
- 21 -

13 Debt to equity ratio is computed by dividing the debt of

a company by its shareholders' equity. The ratio indicates the

level of financing that is provided by the company's shareholders

and its creditors. 

14 Cash-flow ratio is computed by dividing cash-flow by

anticipated debt payments. 

investment banks' proposals and use funds from LIIBV to pay for

GSX. 

LTL assigned its rights and obligations under the GSX

purchase agreement to LWSI before the closing date. LTL and LTI

recorded the transaction on their books as an intercompany

receivable owed to LTL by LTI. LTI recorded the transaction as

an intercompany receivable owed by LWSI. 

LTL borrowed $349,812,613 from TDB on September 30, 1986,

and on October 10, 1986, deposited it in a GSX purchase escrow

account. In a document entitled "Loan Agreement" signed by

Cairns and dated as of September 30, 1986, LTL agreed to many

conditions for the loan that typically accompany commercial

loans, including not to allow its ratio of current assets to

current liabilities to be less than 1 to 1, its debt to equity

ratio13 to be greater than 2.5 to 1, its cash-flow ratio14 to be

less than 1.25 to 1, and its net worth to be less than C$325

million. 

On October 10, 1986, LWSI wrote promissory notes payable to

LTI on demand for $124,812,613, $125 million, and $100 million (a

total of $349,812,613). Each promissory note required LWSI to
- 22 -

pay LTI interest quarterly at a rate equal to ABN Bank's U.S.

prime rate plus 2 percent. 

On October 14, 1986, LWSI bought all of the stock of GSX

from GSX's parent for $349,812,613. On October 14, 1986, the GSX

purchase escrow disbursed $349,812,613 to GSX's parent and gave

the three LWSI promissory notes to LTI. After the GSX sale, LTI

owed LTL $349,812,613 (which was unsecured) with interest at a

rate equal to the U.S. prime rate. 

On October 20, 1986, LWSI's $124,812,613 promissory note was

assigned to LTL, then to Transit, then to LIL, and then to LIIBV. 

In exchange for this assignment, LIIBV executed a promissory note

to LIL for an interest-free loan from LIL in the same amount as

the assigned note. On November 10, 1986, LWSI's $125 million

promissory note was assigned to LIIBV. Haworth and Cairns signed

the documents through which the notes were assigned. 

On December 10, 1986, LWSI told LIIBV that LWSI could not

lower its debt to equity ratios to a level acceptable to ABN Bank

by issuing equity. This was partly because the equity market was

weak at that time. 

LIIBV transferred to LWSI $21 million on February 18, 1987,

and $79 million on June 15, 1987. LWSI used these funds to repay

LTI for the $100 million promissory note. 

Initially LTL, and later LIIBV, financed LWSI's acquisition

of GSX. As part of that initial financing LTL and LIIBV required 

LWSI to pay interest at a rate of 10.5 percent on the amount
- 23 -

LIIBV advanced to it. LII's directors, including Ferrill,

approved the intercompany financing to buy GSX because the rates

and terms were more favorable to LII than those from commercial

lenders. On July 7, 1987, LII and LWSI signed a new loan

agreement with LIIBV. It included balances from previous

advances and kept the 10.5 percent interest rate. 

LTL repaid its loan from TDB relating to the GSX acquisition

primarily with money that LTL raised in equity markets. 

2. Result of the GSX Purchase

The GSX purchase made LII the third largest solid waste

services business in the United States and the second or third

largest provider of hazardous waste disposal services in the

United States. 

LII's credit lines from commercial lenders limited LII's

debt to equity ratio to no more than 2 to 1. As a result, LII's

debt under these lines of credit could not exceed $247.8 million. 

LII's debt after the GSX acquisition was $491.1 million. If

LII's debt to equity ratio exceeded 2 to 1, it would be required

to renegotiate its commercial loans. The debt from the GSX

acquisition made it harder for LII to meet the financial ratio

requirements established by credit agreements with its commercial

lenders. Before acquiring GSX, LII's debt to equity ratio (based

on book value) was less than 1 to 1; after the acquisition, it

was almost 3.1 to 1. LII's primary competitors in the U.S. solid

waste services industry had debt to equity ratios below 2 to 1. 
- 24 -

3. LESI

GSX changed its name to LESI. LESI became an indirect

subsidiary of LWSI in October 1986. LESI was the holding company

for the hazardous waste services operating subsidiaries of the

LII group. 

On April 11, 1989, LESI and International Technologies

Corp., an unrelated U.S. corporation, formed LESCAL. LESI owned

70 percent of LESCAL and International Technologies Corp. owned

30 percent. On March 31, 1993, LESI bought International

Technologies Corp.'s stock in LESCAL. 

F. LTI's Centralized Cash Management Program (CCMP)

Before 1987, LTI had a program with its subsidiaries to

manage cash called the CCMP. The CCMP had the following

accounts. LTI had an account called a master concentration

account or first tier account. Transit, Tree, and LWSI, LTI's

subsidiaries one level below LTI, had second tier concentration

accounts. Regions of Transit, Tree, and LWSI had third tier

concentration accounts. Operating companies in those regions had

fourth tier concentration accounts. 

The CCMP accounts operated as follows. At the end of each

day, each operating company netted the cash it received against

the cash it disbursed. The operating company netted the cash in

a general account. The operating company then transferred any

extra cash in the general account to the appropriate third tier

account. If there was a cash shortage in the operating company's
- 25 -

general account, cash was transferred from the appropriate third

tier account to the operating company's fourth tier account. All

fourth tier accounts were zeroed out at the end of the day. 

Next, the same thing was done for third and then second tier

accounts. Each second tier account was zeroed out with transfers

to or from the first tier master account. The parties to the

CCMP accounted for the transfers between the accounts as

intercompany receivables or payables. The parties to the CCMP

charged what they claim to be interest on all intercompany

payables established under the CCMP. 

In July 1987, LTI, Transit, LWSI, and Tree established a

unified CCMP at FNBC. In 1987 and 1988, LTI's CCMP overdraft

limit was between $25 and $30 million for its master

concentration account at FNBC. 

LTL summarized the transfers of money to be made through

FNBC's accounts for FNBC officials in Canada. At the end of each

day, LTL or its subsidiaries redeposited enough money in the FNBC

CCMP accounts to cover any overdrafts resulting from transfers. 

LII had a separate CCMP with its subsidiaries. 

G. The Advances at Issue

1. LIL, LIIBV, and LTL

In the years in issue, LIIBV's primary activity was to

receive funds from LIL and transfer them to petitioners,

generally on the same or next day. LIIBV advanced funds only to

Laidlaw affiliates in the years in issue. LIIBV's funds came

almost exclusively from LIL and from petitioners' payments to

LIIBV. 
- 26 -

When a Laidlaw entity asked for an advance, LIIBV asked LIL

to provide funds for the transaction. When LIL advanced those

funds to LIIBV, LIL told LIIBV to record the advance as an

interest-free loan and as a capital contribution, in proportions

designated by LIIBV and Coopers & Lybrand. This was done in part

to comply with Dutch tax rulings. 

Written agreements between LIL and LIIBV generally required

LIL to provide funds requested by LIIBV, as long as those amounts

were no more than amounts that LIIBV agreed to advance to

petitioners or their subsidiaries. LIIBV agreed to repay

advances from LIL on demand. LIIBV's managing directors issued

more stock to LIL as needed to make LIIBV's debt to equity ratio

comply with Dutch tax rulings. 

2. Advances at Issue

LIIBV transferred the following amounts of money to Transit,

LWSI, and Tree during the years in issue:

DATE

 LIIBV Advances To --

 TRANSIT LWSI TREE TOTAL

CUMULATIVE

BALANCE

12/18/85 $5,000,000 -0- -0- $5,000,000 $5,000,000

02/18/86 18,000,000 -0- -0- 18,000,000 23,000,000

04/29/86 30,100,000 $29,000,000 -0- 59,100,000 82,100,000

05/29/86 9,588,797 -0- -0- 9,588,797 91,688,797

08/06/86 54,000,000 -0- -0- 54,000,000 145,688,797

08/28/86 2,204,674 -0- -0- 2,204,674 147,893,471

Total FY1986 118,893,471 29,000,000 -0- 147,893,471

10/20/86 -0- 124,812,613 -0- 124,812,613 272,706,084

11/10/86 43,800,000 125,000,000 -0- 168,800,000 441,506,084

11/25/86 5,870,270 -0- -0- 5,870,270 447,376,354
- 27 -

DATE

 LIIBV Advances To --

 TRANSIT LWSI TREE TOTAL

CUMULATIVE

BALANCE

02/18/87 -0- 21,000,000 -0- 21,000,000 468,376,354

02/25/87 11,535,627 -0- -0- 11,535,627 479,911,981

05/28/87 12,468,151 6,400,000 $20,000,000 38,868,151 518,780,132

06/15/87 -0- 99,000,000 -0- 99,000,000 617,780,132

08/31/87 15,280,674 -0- -0- 15,280,674 633,060,806

Total FY1987 88,954,722 376,212,613 20,000,000 485,167,335

11/30/87 16,700,000 -0- -0- 16,700,000 649,760,806

12/16/87 -0- 60,900,000 -0- 60,900,000 710,660,806

02/08/88 45,000,000 -0- -0- 45,000,000 755,660,806

02/29/88 -0- 90,448,000 -0- 90,448,000 846,108,806

04/18/88 17,000,000 11,000,000 -0- 28,000,000 874,108,806

04/29/88 -0- 10,000,000 -0- 10,000,000 884,108,806

05/31/88 -0- 21,045,000 -0- 21,045,000 905,153,806

08/08/88 31,000,000 17,000,000 -0- 48,000,000 953,153,806

08/31/88 -0- 22,000,000 -0- 22,000,000 975,153,806

Total FY1988 109,700,000 232,393,000 -0- 342,093,000

LIIBV continued to advance money to LTI, Transit, LWSI,

Tree, and other LTI subsidiaries after August 31, 1988. By

December 31, 1994, LIIBV had advanced $1,393,383,974 to

petitioners.
- 28 -

3. Typical Advances From LTL to LIIBV and From LIIBV to

Petitioners

a. Typical Advance From LTL to LIIBV to Transit

LIIBV's February 18, 1986, advance to Transit typified how

LIIBV received funds from LIL and immediately advanced the funds

to one of the petitioners. The steps for the February 18, 1986,

advance were as follows:

Steps for the February 18, 1986, Transfers

1. LTL received $18 million from its August 1985 issue of

preferred shares. 

2. LTL transferred $18 million to LIL. LIL issued stock to

LTL. 

3. LIL transferred $18 million to LIIBV. 

4. LIIBV transferred $18 million to Transit. 

b. Transfers Between U.S. Subsidiaries and LIIBV

The following descriptions show in greater detail how

petitioners and LIIBV (including LIIBV Curaçao) transferred funds

during the years in issue:

August 28, 1986, Transfers

U.S. Subsidiaries to LIIBV LIIBV to U.S. Subsidiaries

LII for LWSI $573,958 LWSI -0- 

Transit 1,630,716 Transit $2,204,674

Total 2,204,674 Total 2,204,674

Steps for the August 28, 1986, Transfers

1. LII borrowed $573,958 from RBC for LWSI. 

2. LII transferred $573,958 to LIIBV for LWSI. 

3. Transit transferred $1,630,716 to LIIBV. 

4. LIIBV transferred $2,204,674 to Transit. 
- 29 -

November 25, 1986, Transfers

U.S. Subsidiaries to LIIBV LIIBV to U.S. Subsidiaries 

Transit to LIIBV $3,097,820 LIIBV to Transit $5,870,270

LWSI to LIIBV 2,772,451 LIIBV to LWSI -0- 

Total 5,870,271 Total 5,870,270

Steps for the November 25, 1986, Transfers

1. LWSI transferred $2,772,451 to LIIBV. 

2. Transit transferred $3,097,820 to LIIBV. 

3. LIIBV transferred $5,870,270 to Transit. 

February 24-25, 1987, Transfers

U.S. Subsidiaries to LIIBV LIIBV to U.S. Subsidiaries

LWSI $7,532,238 LWSI -0-

Transit 4,003,389 Transit $11,535,627

Total 11,535,627 Total 11,535,627

Steps for the February 24-25, 1987, Transfers

1. LTL authorized TDB to transfer $4,003,389 to Transit; the

funds were transferred to LTI. 

2. LTI transferred $4,003,389 to Transit. 

3. Transit transferred $4,003,389 to LIIBV. 

4. LWSI received $7,532,238 from RBC. 

5. LWSI transferred $7,532,238 to LIIBV.

6. LIIBV transferred $11,535,627 to Transit. 

7. Transit transferred $10,000,000 to LTI. 

May 28, 1987, Transfers

U.S. Subsidiaries to LIIBV LIIBV to U.S. Subsidiaries

Transit $4,479,972 Transit $12,468,151

LWSI 7,988,179 LWSI -0- 

Total 12,468,151 Total 12,468,151

Steps for the May 28, 1987, Transfers--Transaction 1

1. LWSI received loan proceeds of $7,988,179 from RBC. 

2. RBC wired the funds to LIIBV. 

3. Transit transferred $4,479,972 to LIIBV. 

4. LIIBV transferred $12,468,151 to Transit. 
- 30 -

Steps for the May 28, 1987, Transfers--Transaction 2

1. LTL transferred $26,400,000 to LIL. 

2. LIL transferred $26,400,000 to LIIBV. 

3. LIIBV transferred $20,000,000 to LTI. 

4. LIIBV transferred $6,400,000 to RBC on behalf of LWSI. 

5. LTI transferred $20,200,000 to LWSI. 

6. LWSI transferred $16,000,000 to Thomas Terry, Jr., to

acquire Tree. 

7. LWSI transferred $4,200,000 to Tree. 

August 31, 1987, Transfers

U.S. Subsidiaries to LIIBV LIIBV to U.S. Subsidiaries

Transit $5,071,716 Transit $15,280,674

LWSI 10,297,291 LWSI -0- 

LTI for Tree 546,667 LTI for Tree -0- 

Total 15,915,674 Total 15,280,674

Steps for the August 31, 1987, Transfers

1. LWSI transferred $6,000,000 to LTI. 

2. LTI transferred $3,663,625 to LWSI. 

3. LTI transferred $546,667 on Tree's behalf to LIIBV.

4. Transit transferred $5,071,716 to LIIBV. 

5. LIIBV transferred $15,280,674 to Transit. 

6. LWSI transferred $10,297,291 to LIIBV. 

7. LTI transferred $12,790,221 to LWSI. 

8. Transit transferred $7,448,587 to LTI. 

November 30, 1987, Transfers

U.S. Subsidiaries to LIIBV LIIBV to U.S. Subsidiaries

LTI for Tree $549,028 Tree -0-

LTI for Transit 5,705,723 Transit $16,700,000

LTI for LWSI 10,597,883 LWSI -0- 

Total 16,852,634 Total 16,700,000

Steps for the November 30, 1987, Transfers

1. On Tree's behalf, LTI transferred $549,028 to LIIBV.

2. On Transit's behalf, LTI transferred $5,705,723 to LIIBV. 

3. On LWSI's behalf, LTI transferred $10,597,883 to LIIBV.

4. LIIBV transferred $16,700,000 to Transit. 

5. LTI received $82,624,902, $49,819,429 of which was from

Transit.

6. LTI transferred $29,976,998 to LWSI. 

7. LTI transferred $32,609,046 to Transit. 
- 31 -

February 29, 1988, Transfers

U.S. Subsidiaries to LIIBV LIIBV to U.S. Subsidiaries

LTI for LWSI $11,991,976 LWSI $12,448,000

LTI for Transit 6,346,874 Transit -0- 

Tree 539,583 Tree -0- 

Total 18,878,433 Total 12,448,000

Steps for the February 29, 1988, Transfers--Transaction 1

1. On behalf of LWSI, LTI transferred $11,991,976 to LIIBV. 

2. On behalf of Transit, LTI transferred $4,591,927 to LIIBV.

3. On behalf of Transit, LTI transferred $1,754,947 to LIIBV

Curaçao. 

4. Tree transferred $539,583 to LIIBV. 

5. LIIBV transferred $10,728,000 to LIIBV Curaçao. 

6. LIIBV Curaçao transferred $12,448,000 to LWSI. 

7. LIIBV transferred $2,000,000 to LIL. 

8. LTI transferred $654,473 to Tree. 

9. LWSI transferred $12,448,000 to LTI. 

Steps for the February 29, 1988, Transfers--Transaction 2

1. LTL received $13,000,000 from TDB.

2. RBC transferred $63,000,000 to LTL. 

3. LTL transferred $78,000,000 to LIL. 

4. LIL transferred $78,000,000 to LIIBV.

5. LIIBV transferred $78,000,000 to LWSI. 

6. LTI transferred $15,096,068 to TDB. 

7. LTI transferred $63,384,285 to RBC. 

8. LWSI transferred $78,000,000 to LTI. 

May 31, 1988, Transfers

U.S. Subsidiaries to LIIBV and LIIBV Curaçao 

LIIBV and LIIBV Curaçao to U.S. Subsidiaries 

Tree $542,499 Tree -0-

LWSI 15,015,471 LWSI $21,045,000

Transit 7,534,621 Transit -0- 

Total 23,092,591 Total 21,045,000

Steps for the May 31, 1988, Transfers

1. LTI transferred $5,770,188 to Transit. 

2. LTI transferred $14,677,818 to LWSI. 

3. Tree transferred $542,499 to LIIBV. 

4. LWSI transferred $14,677,818 to LIIBV.

5. LWSI transferred $337,653 to LIIBV Curaçao. 

6. Transit transferred $5,770,188 to LIIBV. 

7. Transit transferred $1,764,433 to LIIBV Curaçao.
- 32 -

8. LIIBV transferred $18,985,000 to LIIBV Curaçao. 

9. LIIBV Curaçao transferred $21,045,000 to LWSI. 

10. LIIBV transferred $2,000,000 to LIL. 

11. LIL transferred $2,000,000 to Transit and affiliates. 

12. Transit and affiliates transferred $2,000,000 to LTL. 

13. LTL repaid $2,000,000 in long-term debt. 

14. LTI transferred $783,381 to Tree. 

15. LWSI transferred $8,794,145 to LTI. 

16. Transit transferred $981,987 to LTI. 

August 31, 1988, Transfers

U.S. Subsidiaries to LIIBV and LIIBV Curaçao 

LIIBV and LIIBV Curaçao to U.S. Subsidiaries 

Transit $8,580,485 Transit -0-

LWSI 16,546,460 LWSI $22,000,000

Tree 581,666 Tree -0- 

Total 25,708,611 Total 22,000,000

Steps for the August 31, 1988 Transfers

1. FNBC transferred $2,900,000 to LTI. 

2. LTI received $19,617,722. Transit and LWSI transferred

funds to their respective general payables accounts with

FNBC. From these accounts, $19,617,722 was transferred to

LTI's FNBC master concentration account in an "Automatic

Clearing House" transaction. 

3. LTI transferred $22,261,038 to LIIBV as follows: $6,688,667

on Transit's behalf and $15,572,371 on LWSI's behalf. 

4. Tree transferred $581,666 to LIIBV. 

5. Transit transferred $1,891,818 to LIIBV Curaçao. 

6. LWSI transferred $974,089 to LIIBV Curaçao. 

7. LIIBV transferred $19,134,704 to LIIBV Curaçao.

8. LIIBV Curaçao transferred $22,000,000 to LWSI. 

9. LWSI transferred $22,000,000 to LTI. 

10. LTI transferred $17,900,000 to LWSI. 

11. LTI transferred $35,000,000 to LII. 

12. LWSI transferred $40,993,136 to LTI. 

13. LTI transferred $278,419 to Tree. 

14. LTI transferred $6,651,824 to Transit. 

c. LTL's Description of an LIIBV Transfer

In 1986, RBC arranged for LTL to borrow funds for what RBC

described as a "'double dip' taxation driven transaction". In

that transaction, RBC's loans were repaid in the United States

and new loans were made from Canada. LTL summarized the

following steps of one of those fund transfers in a memorandum
- 33 -

15 LWSI transferred $29 million to its affiliate, Societe

Sanitaire, to buy preferred stock in Travelways, Ltd. However,

it is not clear whether it used the $29 million it borrowed for

that purpose. 

relating to an advance on February 8, 1988, by LTL to LIIBV to

Transit:

1. LTL borrowed $45 million from TDB;

2. LTL lent the funds to Transit Ltd. at the prime rate;

3. Transit Ltd. contributed the funds to LIL for Class B

shares;

4. LIL advanced funds to LIIBV via ABN Bank (New York);

5. LIIBV advanced funds to Transit Ltd. at prime plus 2

percent;

6. Transit Ltd. paid down intercompany debt to LTI; and

7. LTI paid $45 million. 

d. Advances to Transit

On November 10, 1986, Transit signed a demand note payable

to LTI for $43.8 million. Also on that day, the note was

assigned to LTL, then to Transit, then to LIL, and then to LIIBV. 

Haworth and Cairns signed each assignment. The $43.8 million was

incorporated into a loan agreement dated "as of September 1,

1986".

Transit acquired stock and assets of 44 companies in the

transportation industry for $50,744,478 in the year ending August

1986, $20,736,304 in the year ending August 1987, and $71,573,421

in the year ending August 1988. Transit used $24,798,393 from

LIIBV for interest reinvestment loans. 

e. Advances to LWSI LWSI used advances from LIIBV

as follows:15 $349,812,613 to buy GSX; $6.4

million to repay RBC loans; $60.9 million to

repurchase LII stock; and $43,553,907 to pay

interest to LIIBV (interest reinvestment loans). 
- 34 -

LWSI bought stock and assets in 31 companies in the solid

waste services industry for $5,384,708 in the year ending August

1986, $373,534,605 in the year ending August 1987, and

$71,837,698 in the year ending August 1988, largely with advances

from LIIBV.

f. Financing the LII Stock Repurchase

The public held 21 to 24 percent of LII's stock until

December 16, 1987. In December 1987, LII began to buy those

publicly held shares through a tender offer totaling about $93

million ($22 per share). Ferrill, a director of LII from 1982 to

1987, convinced DeGroote to increase the repurchase price for LII

stock from $17-18 per share to $22 per share. The trading price

was $15.50 per share on November 9, 1987. LII completed the

repurchase on December 16, 1987. LII became wholly owned by

members of the LTL group. 

On December 15, 1987, LTI signed a loan agreement with LIIBV

which had the same terms as those in LIIBV's May 27 and July 7,

1987, agreements with Transit, LWSI, and Tree. On December 16,

1987, LTI used a $60.9 million advance from LIIBV to pay for LII

stock that LII had repurchased from the public. On December 16,

1987, LWSI assumed LTI's obligations to LIIBV on the $60.9

million loan. 

g. Financing the Purchase of Monroe

LAC borrowed $20 million from LIIBV pursuant to a loan

agreement dated May 27, 1987. LAC used the proceeds of the loan

to buy Monroe ($16 million) and to refinance third-party loans
- 35 -

relating to Monroe's purchase of rolling stock ($4 million). In

October 1990, LTI sold Monroe, renamed Laidlaw Tree Services,

Inc., to an unrelated party for $17.4 million. At that time, LTI

assumed Tree's obligation to repay $22.5 million to LIIBV, and

Tree agreed to pay $22.5 million to LTI. 

4. General Terms and Conditions of the LIIBV Agreements

LTL's counsel, Cairns, wrote the first draft of all of

the LIIBV loan agreements. LIIBV and petitioners

revised some of the agreements.

The loan agreements and promissory notes between LIIBV,

Transit, LWSI, Tree, and LTI and LII as guarantors: (a) Said

that the borrower unconditionally promised to repay advances on a

fixed date or on demand; (b) said that LTI guaranteed LIIBV that

Transit and Tree would repay the advances, and LII guaranteed

LIIBV that LWSI would repay the advances; (c) said that the

borrower must pay a fixed or determinable rate of interest

regardless of whether the borrower or guarantor had any income or

distributed dividends; (d) said that LIIBV could require the

borrower and the guarantor to pay principal and interest; (e)

said that LIIBV's rights were senior to the rights of the equity

holders of the nominal borrower and guarantor; (f) did not

authorize LIIBV to convert the obligations into stock of the

nominal borrower or the guarantor; (g) did not authorize LIIBV to

participate in the management of the nominal borrower or the

guarantor; (h) did not say that the nominal borrower's obligation

to repay LIIBV was contingent; and (i) said that LIIBV could
- 36 -

16 Loans to Transit under the Feb. 4, 1986, agreement were

to mature on Sept. 1, 1988, unless the outstanding principal was

previously converted into a term loan to be repaid in 10

semiannual installments. 

transfer the advances to any person without regard to any

transfer of stock of the borrower. 

Petitioners and LIIBV treated the advances from LIIBV to

Transit, LWSI, and Tree as loans on their financial statements. 

LIIBV could have sued, but did not, to enforce the agreements. 

During the years in issue, LWSI and LWSL had credit lines

from RBC and BBC totaling about $250 million, which were senior

to LIIBV's and LTL's advances. 

5. Terms and Conditions of Specific LIIBV Agreements

a. Transit and LWSI Loan Agreements

LIIBV advanced $5 million to Transit on open account on

December 18, 1985. On February 4, 1986, Transit and its

subsidiaries, and LTI as guarantor, signed a loan agreement with

LIIBV which established a $50 million line of credit convertible

to a 5-year term loan due on September 1, 1988.16 Transit agreed

to pay interest quarterly beginning on May 31, 1986. The

agreement included an acceleration clause (i.e., the full amount

advanced would be due if Transit defaulted). Transit and LTI

agreed that they would each would maintain a long-term debt to

equity ratio of no more than 2 to 1 and a current assets to

current liabilities ratio of no less than 1 to 1. 

The agreement did not require the directors of Transit or

LTI to adopt a resolution authorizing the guaranty or require the
- 37 -

borrower or guarantor to obtain legal opinions concerning

enforceability of the guaranty. The agreement did not require a

covenant that the guaranty would rank no lower than that of all

unsecured indebtedness of the guarantor. The agreement required

Transit to provide financial information concerning the guarantor

only when requested. On April 23, 1986, Transit and LTI as

guarantor amended the February 4, 1986, loan agreement with LIIBV

to increase the line of credit to $100 million and amended the

interest rate provisions from a variable rate equal to the prime

interest rate of the ABN Bank, New York, to a variable rate equal

to the lower of the prime interest rate of the ABN Bank, New

York, and the 60 day LIBOR interest rate plus 1⁄2 percent. 

Also on April 23, 1986, LWSI and LII as guarantor signed a

loan agreement with LIIBV for $50 million. The terms were

similar to the Transit agreement, as amended, but LWSI agreed to

limit its debt to equity ratio to no more than 2.5 to 1. 

On May 26, 1986, before the May 31, 1986, interest payment

date, LIIBV amended its loan agreements with Transit and LWSI to

modify the interest rates. 

On August 6, 1986, LIIBV advanced $54 million to Transit for

which Transit signed a demand note. 

The loans to which LIIBV and petitioners agreed before

September 1, 1986, did not require the borrowers to make periodic

principal payments. The agreements permitted Transit and LWSI to

convert the agreements to term loans on or before the maturity

date. All of the pre-September 1986 LIIBV loans were payable on
- 38 -

September 1, 1988. If Transit or LWSI chose to convert, the

loans from LIIBV would become fixed-term loans repayable in 10

equal semiannual installments. However, LIIBV could demand

repayment at any time if it needed the funds. 

After the GSX acquisition, LTI and LII did not comply with

leverage ratios to which they had agreed in the loan agreements

with TDB, RBC, and BBC. On October 16, 1986, Haworth told LIIBV

that LII's repayment of its advances must be subordinated to

LII's commercial lenders. Also on October 16, 1986, Haworth

asked LIIBV to amend petitioners' loan agreements to provide,

effective September 1, 1986, that (1) all sums would be due on

demand at interest rates equal to the prime rate at ABN Bank, New

York, plus 2 percent, (2) petitioners need not meet any financial

ratios, (3) petitioners no longer had restrictions as to the

maximum amount of funds they could seek and that LIIBV was to

provide on request, subject to availability of funds, and (4)

LIIBV would subordinate its advances to petitioners to their bank

loans. On October 20, 1986, LIIBV's managing board unanimously

agreed to subordinate repayment of its advances to Transit's bank

loans. 

Transit and LWSI made new loan agreements with LIIBV, dated

"as of September 1, 1986". In the first of these agreements,

signed by Haworth for Transit, LIIBV subordinated Laidlaw's and

Transit's indebtedness to LIIBV to any amounts owed by Laidlaw to

TDB. 
- 39 -

LTL entered into postponement agreements in favor of RBC and

BBC in November 1986. RBC and BBC relied on the agreements. The

agreements provided that Canadian law applied.

On December 11, 1986, LTL's board of directors agreed to

subordinate LII's debt to LTL to any loan from RBC to LII to

prevent default under the RBC loan agreement. On the same day,

LTL's board signed a loan agreement with LII and LWSI in which

LTL lent LWSI $350 million to be due on October 14, 1989. The

loan agreement required that, at LWSI's request, LWSI's

indebtedness to LTL would be subordinated to the indebtedness of

LWSI to RBC and BBC. 

LTI and LTL signed a joint loan agreement with RBC in 1987,

under which LTL guaranteed RBC's advances to LTI. LTL, LTI, and

LII signed subordination agreements with several commercial

banks, including RBC, BBC, and TDB in part because LTL and its

subsidiaries were highly leveraged after the GSX acquisition. 

Petitioners and LIIBV gave each commercial bank priority over the

intercompany advances from LTL and its subsidiaries (including

LIIBV). 

On February 13, 1987, Haworth told LIIBV that subordination

of the LIIBV advances to petitioners would no longer be

necessary. On March 16, 1987, LIIBV's board voided the

subordination agreement in the first "as of September 1, 1986"

agreement. A second "as of September 1, 1986" loan agreement,

signed by Haworth and Cairns for Transit, included the amendments
- 40 -

suggested by Haworth other than the provision to subordinate

loans. It provided that LWSI or Transit would give LIIBV

promissory notes and that the advances, which those notes

represented, would be treated as if they had been made under the

loan agreement. The second "as of September 1, 1986" agreement

substituted a demand feature for a fixed maturity date. LIIBV

did not require Transit, Tree, and LWSI to have a reserve or

sinking fund to assure that they could repay the advances. The

second "as of September 1, 1986" agreement governed all prior

advances by LIIBV to Transit or LWSI.

On July 7, 1987, LTI, Transit, LII, and LWSI signed new loan

agreements with LIIBV. These agreements governed all advances

made by LIIBV to Transit and LWSI before July 7, 1987. They

included the same terms as the "as of September 1, 1986"

agreements, except that (1) the July 7, 1987, agreements

eliminated the demand feature from the previous loan agreements

and established fixed terms with principal balances due September

1, 1989, unless the parties extended the due date by written

agreement, and (2) the parties added some enforcement provisions,

including an acceleration clause. LIIBV did not require a

reserve or sinking fund to assure that petitioners would repay

the advances. 
- 41 -

b. Funds to Buy Tree and Advances to Tree

On May 25, 1987, LTL asked LIIBV to make a $20 million loan

to LAC on May 28, 1987. As stated at par. I-C-1, above, LTL used

LAC to buy Monroe, which became Tree. On May 27, 1987, LAC and

LTI signed loan agreements with LIIBV, which had the same terms

as LIIBV's July 7, 1987, agreements with LWSI and Transit. LTI

guaranteed repayment of the LIIBV advances to Tree. 

c. LIIBV's September 12, 1988, Board Meeting

On September 12, 1988, the members of LIIBV's board of

directors discussed repayment by Transit, LWSI, and Tree of the

advances from LIIBV. At that time, the advances were due to be

repaid on September 1, 1989. The board decided to extend the

repayment date. The minutes for that meeting stated that LIIBV's

management did not intend to request repayment.

6. Repayment of Principal

Petitioners did not repay any principal to LIIBV from the

date of the initial advance in December 1985 to October 1989. 

Petitioners repeatedly extended the due date for most of the

principal amounts that petitioners owed to LIIBV. 

Up until the time of trial, petitioners and their

subsidiaries had not reduced the total unpaid balances that they

owed to LIIBV below the $975,153,806 which was outstanding as of

August 31, 1988. 
- 42 -

7. Payment of Interest

a. Background

During the years in issue, on the same day that LIIBV

received payments from petitioners which petitioners and LIIBV

denominated as interest, LIIBV generally transferred that amount

of money to one or more petitioners in what petitioners called

interest reinvestment loans. LIIBV, Transit, LWSI, and Tree did

this through a series of prearranged steps. LTL and LIIBV

decided how much interest each petitioner would owe before each

interest payment was due. LIIBV decided how much of the interest

payment to use to pay its costs of operations and to pay

dividends to LIL. LTL decided which petitioner would ask for an

interest reinvestment loan from LIIBV. 

On the day that petitioners made a payment denominated as

interest to LIIBV, LIIBV typically transferred to petitioners an

amount equal or close to the amount of the payment. Petitioners

recorded these transactions in their books and records as

interest payments. Transit or LWSI made a payment denominated as

interest to LIIBV each time they received an interest

reinvestment loan from LIIBV. Many of the transactions described

in par. I-G-3, above, included interest reinvestment loans. 

LIIBV transferred to Transit, LWSI, and Tree interest

reinvestment loans totaling more than 90 percent of what

petitioners contend are interest payments to LIIBV for the years

in issue. 
- 43 -

Transit made no quarterly interest payments to LIIBV from

May 1986 to November 1987. LWSI made no quarterly interest

payments to LIIBV from February to August 1988. Instead, LIIBV

increased Transit's and LWSI's account balances to include the

interest payments due during that time.

During their 1989 taxable years, Transit, LWSI, and Tree

increased their account balances to include interest on the

interest reinvestment loans from LIIBV. 

b. Summary of Interest Payments and Interest

Reinvestment Loans in the Years in Issue

The following table shows interest reinvestment loans and

what petitioners contend are interest payments in the years in

issue: 

Date Interest

Reinvestment

Loan From

LIIBV

Claimed

Interest

Payment

From

Transit to

LIIBV

Claimed

Interest

Payment

From LWSI

to LIIBV

Claimed

Interest

Payment

From Tree

to LIIBV

Total

Claimed

Interest

Payments to

LIIBV

5/29/86 $988,797*+ $809,057 $179,740 - $988,797

8/28/86 2,204,674* 1,630,716 573,958 - 2,204,674

11/25/86 5,870,270* 3,097,820 2,772,450 - 5,870,270

2/25/87 11,535,627* 4,003,389 7,532,238 - 11,535,627

5/28/87 12,468,151* 4,479,972 7,988,179 - 12,468,151

8/31/87 15,280,674* 5,071,716 10,297,291 $546,667 15,915,674

11/30/87 16,700,000* 5,705,723 10,597,883 549,028 16,852,634

2/29/88 12,448,000** 6,346,874 11,991,976 539,583 18,878,433

5/31/88 21,045,000** 7,534,621 15,015,471 542,499 23,092,591

8/31/88 22,000,000** 8,580,485 16,546,460 581,666 25,708,611

Total 120,541,193 47,260,373 83,495,646 2,759,443 133,515,462
- 44 -

* Advances to Transit; ** Advances to LWSI; + Included in

$9,588,797 transfer on May 28 to 30, 1987. 

An example of how petitioners used an interest reinvestment

loan is the transaction on May 28 to 30, 1986, in which LIIBV

transferred $988,797 to U.S. subsidiaries and U.S. subsidiaries

claimed interest payments totaling $988,797. 

May 28 to May 30, 1986, Transfers

U.S. Subsidiaries to LIIBV LIIBV to U.S. Subsidiaries

LWSI $179,740 Transit $8,600,000

Transit 809,057 Transit reinvest 988,797

Total 988,797 Total 9,588,797

Steps for the May 28 to May 30, 1986, Transfers

1. LTL received $8.6 million from TDB on May 28. 

2. LTL transferred $8.6 million to LIL on May 28. 

3. LWSI transferred $179,740 to LIIBV on May 29. 

4. Transit transferred $809,057 to LIIBV on May 29. 

5. LIIBV transferred $9,588,797 to Transit on May 29. This

caused an $8,596,000 overdraft in LIIBV's ABN Bank NY

account. 

6. LIIBV was credited with $8.6 million from LIL on May 30. 

8. LTI's Commercial Loans

During its taxable years ending from August 31, 1989, to

August 31, 1995, LTI frequently borrowed funds from commercial

lenders to help make petitioners' quarterly interest payments and

semiannual principal payments to LIIBV. 

H. Petitioners' Financial Condition

1. Capitalization of Petitioners in the Years in Issue

The transportation and waste services industries are

capital-intensive. Petitioners constantly needed to buy trucks

and buses and improve landfill sites. Petitioners could not

eliminate or significantly reduce their capital spending for a
- 45 -

17 LII's free cash-flow was a positive $3,888,281 for its

1985 fiscal year. 

long period of time without hurting their business or possibly

going out of business.

Petitioners were thinly capitalized and heavily leveraged

during the years in issue largely because they borrowed large

amounts from LIIBV before and during the years in issue. 

2. Petitioners' Cash-Flow During the Years in Issue

Petitioners' free cash-flow (earnings before interest,

taxes, depreciation, and amortization (EBITDA) - capital

expenditures (CAPEX)) for the years in issue17 was negative as

follows:

 1986 1987 1988 

LTI ($63,490,919) ($351,973,233) ($109,555,409)

LII ($3,177,391) ($294,312,141) ($67,858,322)

On August 31, 1988, petitioners did not have enough free

cash-flow to pay (a) principal and interest due on the LIIBV

advances unless petitioners stopped buying other companies and

reduced other capital expenses by 20 percent, and (b) principal

due over 7 years even if they stopped making all capital

expenditures. 

Petitioners and their companies did not have enough cashflow during the years in issue to repay LIIBV's advances to them

that are at issue here. LII had negative free cash-flows during

the years in issue largely because it and its subsidiaries were

expanding. Petitioners could not repay in installments or pay
- 46 -

the balloon payment due in 1989 as required by the agreements

between themselves and LIIBV. 

3. Petitioners' Tangible Net Worth and Financial Ratios

for the Years in Issue

LTI or LII guaranteed repayment of advances from LIIBV and

commercial banks to Transit, Tree, and LWSI. Financial

statements for those companies for the years in issue (unaudited

for LII for the year ending August 1988) show the following:

LII

 1985 1986 1987 1988 

Tangible Net Worth 57,022 84,341 42,659 (22,630)

(000 omitted) 

 Quick Ratio1 .93 1.12 1.30 1.17

Current Ratio1 1.33 1.62 1.62 1.32

Debt/Equity Ratio .59 .67 3.54 8.43

Liabilities/Equity .87 .89 4.05 9.42 

Liab./Tang. N.W. 1.38 1.31 13.35 N/A

LTI

 1985 1986 1987 1988 

Tangible Net Worth 18,865 28,400 (33,204) (58,027)

(000 omitted) 

Quick Ratio .87 .76 .83 1.02

Current Ratio 1.16 1.36 1.12 1.58

Debt/Equity Ratio 1.61 2.26 5.78 5.63

Liabilities/Equity 2.76 3.26 7.29 6.44

Liab./Tang. N.W. 9.93 12.02 N/A N/A

1 "Current ratio" is current assets (cash and

equivalents, receivables, and inventories) divided by

current liabilities. "Quick ratio" is cash and

equivalents and receivables, or current assets less

inventories, divided by current liabilities. See

Carmichael, et al., Accountant's Handbook, sec. 10.25,

at 10.22 (7th ed. 1991).

Petitioners' competitors in the waste services industry

during 1987 and 1988 generally had debt to equity ratios below 2

to 1. 
- 47 -

LTI's long-term debt, equity, and debt to equity ratios for

years ending from August 1989 to August 1995 were as follows (in

thousands):

 Long-Term Debt to

Year Debt Equity Equity Ratio

1989 $1,788,165 $385,956 4.63

1990 2,008,141 303,739 6.61

1991 1,989,926 475,642 4.18

1992 1,770,805 455,221 3.89

1993 1,741,133 317,935 5.48

1994 1,620,623 452,046 3.59

1995 2,249,500 412,500 5.45

Financial ratios for Transit and Tree for the years in issue

were as follows:

 Transit

 1985 1986 1987 1988 

Tangible Net Worth (7,020) (18,734) (21,529) (56,284)

(000 omitted)

Quick Ratio .13 .40 .77 .81

Current Ratio .22 .57 1.13 1.11

Debt/Equity Ratio 9.94 10.52 9.43 15.44

Liabilities/Equity 11.17 11.71 10.66 16.87

Liab./Tang. N.W. N/A N/A N/A N/A

 Tree

 1985 1986 1987 1988 

Tangible Net Worth - 4,354 (11,666) (5,711)

(000 omitted)

Quick Ratio - 1.40 1.16 1.47

Current Ratio - 1.53 1.23 1.61

Debt/Equity Ratio - .87 95.86 3.09

Liabilities/Equity - 1.54 109.84 3.43

Liab./Tang. N.W. - 1.55 N/A N/A

Petitioners' ratios for earnings before taxes (EBIT) to

interest and EBITDA minus CAPEX to interest for the years in

issue (unaudited for LII for the year ending August 1988) are as

follows:
- 48 -

18 The banks could waive the debt to equity ratio limit.

 LII

 1985 1986 1987 1988

EBIT/Interest 8.93 7.89 1.9 1.65

EBITDA minus 

CAPEX/Interest .94 (.77) (7.81) (1.16) 

 LTI

 1985 1986 1987 1988

EBIT/Interest 7.14 3.38 1.82 1.50

EBITDA minus 

CAPEX/Interest (4.04) (3.92) (6.15) (1.19)

The ratios of EBIT to interest for Transit and Tree for the

years in issue were as follows:

 1985 1986 1987 1988

Transit 2.66 1.98 1.59 1.06

 Tree - 8.30 1.85 1.00

I. Bank Loans

1. Debt to Equity Ratios Required by Banks

Petitioners' ability to borrow from commercial lenders was

limited by leverage ratios and other covenants included in the

loan agreements.18 The maximum that petitioners could borrow

under all of their commercial loan agreements without special

approval by the bank was the amount of debt that would not

increase their debt to equity ratio to more than 2 to 1. LTL,

LTI, LII, and LWSI had commercial loan agreements which required

them as the borrower or the guarantor to have debt to equity

ratios of 2.5 to 1 or less in the taxable years in issue. The

GSX acquisition caused LII to be highly leveraged, which
- 49 -

prevented LII from obtaining additional financing from commercial

lenders. 

2. Transit

Transit had no loans from unrelated lenders during the years

in issue. 

3. LWSI

During the years in issue, LWSI had a $20-$25 million

revolving loan agreement with RBC (Portland, Oregon branch). 

On November 14, 1986, LWSI and LWSL agreed to a joint

revolving loan from RBC, which combined their existing credit

agreements and increased the credit line to $140 million and

later to $240 million. 

LWSI's loan agreements with RBC included conventional

covenants, representations, warranties, and security provisions. 

LII guaranteed the RBC loans to LWSI. RBC required LII to have a

total debt to equity ratio of no greater than 2 to 1 and a

working capital ratio (current assets over current liabilities)

of no less than 1 to 1. 

4. Tree

Before LTI acquired Tree's stock, Tree (then Monroe) had a

term credit agreement with Chase for $3 to $5.5 million. The

terms of Tree's loan agreement with Chase were considerably less

favorable than those with LIIBV. Tree's loan agreement with

Chase included conventional covenants, representations,

warranties, and security provisions. Chase secured the loan to
- 50 -

19 Interest coverage ratios relate the financial charges of

a firm to its ability to service them. An interest coverage

ratio is earnings before interest and taxes net of non-cash

expenses such as depreciation and amortization (EBITDA) divided

by interest expense. This ratio is one measure of a company's

ability to pay interest.

Tree with Tree's assets. Tree agreed to maintain minimum

leverage ratios, current ratios, and interest coverage ratios19

and to meet minimum cash-flow requirements. 

J. Comparison of Terms Governing Advances from LIIBV and Bank

Loans

1. Similarities Between Bank Loans and LIIBV Advances

The bank loans and LIIBV advances for the years in issue

were in writing. All were for general corporate purposes or

acquisition of other businesses. All had some representations

and warranties to the bank or LIIBV about financial conditions of

the recipient. All required corporate existence and authority,

punctual payments, some type of periodic reporting, and notice of

default. All imposed limitations on further encumbering any

security. All treated nonpayment, incorrect or false

representations, noncompliance with material terms and

conditions, insolvency or bankruptcy, and other similar events as

a default. Most had cross-default clauses and acceleration

clauses. Most were guaranteed by a parent. All allowed

prepayment without penalty.

2. Differences Between Bank Loans and LIIBV Advances

Bank loans always had borrowing limits. The LIIBV advances

were generally not limited. Banks lent less than LIIBV advanced. 
- 51 -

Half of the LIIBV advances were more than $100 million, but most

of the bank loans were substantially less than $100 million. 

Bank loans were generally for a 5-year period, and no bank loan

had a demand feature. LIIBV advances were generally not limited

to a fixed period and generally had demand features. LIIBV

generally did not require petitioners to make quarterly or

semiannual payments of principal, but did allow balloon payments. 

Banks required quarterly or semiannual payments of principal and

did not allow balloon payments. Banks required minimum debt to

equity and current assets to current liabilities ratios. LIIBV

generally did not.

The guaranties differed in that the banks required the

guarantors to post collateral and to meet financial requirements. 

LIIBV did not.

Only bank loans had negative covenants that limited the use

of the borrowed funds, or placed limitations on a change of the

borrower's business or on asset dispositions. LIIBV advances did

not. Bank loans generally had more covenants and warranties

relating to the borrower's legal status and activities (e.g.,

compliance with ERISA and securities laws) than LIIBV advances. 

Banks treated material adverse changes in the borrower's

operations or financial condition, certain judgments, and

liquidation, dissolution, or winding up of the borrower's

business as events of default. LIIBV did not.
- 52 -

K. Audit of LTL by Canadian Tax Authorities

Canadian income tax authorities audited LTL for 1987 and

1988. LTL wrote that its U.S. subsidiaries used funds that it

advanced to them to provide capital and that those funds became

part of the permanent capital of the company. LTL said that the

advances provided about 35 percent of the total capital of

Laidlaw in 1987 and 1988. LTL said that if it were to incur a

loss on a loan to a subsidiary it would not be allowed to deduct

the loss as a bad debt. LTL said:

3. Laidlaw Inc. acts as a conduit in providing funds

for its operating subsidiaries. The funds are used by

the subsidiaries as working capital and for capital

acquisitions. Without these funds, the subsidiaries

would be seriously undercapitalized. The loans are in

the nature of capital contributions to the

subsidiaries. 

II. OPINION

A. Contentions of the Parties

The sole issue for decision is whether payments totaling

$133,515,459 from petitioners' subsidiaries to LIIBV during the

years in issue are deductible as interest under sections 162 and

163(a).

Respondent determined and contends that petitioners may not

deduct the payments in dispute as interest because the LIIBV

advances to Transit, Tree, and LWSI were capital contributions

and not loans. Petitioners contend that the amounts in dispute

are deductible as interest under sections 162 and 163(a) because

the LIIBV advances were debt and because the amounts at issue
- 53 -

were interest in substance and form. Respondent's determination

is presumed to be correct, and petitioners bear the burden of

proof. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933).

B. Loans vs. Capital Contributions

The U.S. Court of Appeals for the Fifth Circuit, the circuit

to which these cases are appealable, has identified 13

nonexclusive factors to be considered in deciding whether

advances are debt or equity. Estate of Mixon v. United States,

464 F.2d 394, 402 (5th Cir. 1972). Those factors are: (1) the

name given to the certificate evidencing the indebtedness; (2)

the presence or absence of a fixed maturity date; (3) the source

of payments, i.e., whether the recipient of the funds can repay

the advance with reasonably anticipated cash-flow or liquid

assets; (4) whether the provider of the funds has the right to

enforce payment; (5) whether the provider of the advance gains an

increased right to participate in management; (6) the status of

the contribution in relation to regular creditors; (7) the intent

of the parties; (8) whether the recipient of the advance is

adequately capitalized; (9) whether there is an identity of

interest between the creditor and the shareholder; (10) source of

interest payments, i.e., whether the recipient of the funds pays

interest from earnings; (11) the ability of the corporation to

obtain loans from outside lending institutions; (12) the extent

to which the recipient used the advance to buy capital assets;
- 54 -

and (13) whether the recipient repaid the funds on the due date

(Mixon factors). Id.; see also Texas Farm Bureau v. United

States, 725 F.2d 307, 311 (5th Cir. 1984); Slappey Drive Indus.

Park v. United States, 561 F.2d 572, 582 (5th Cir. 1977);

Plantation Patterns, Inc. v. Commissioner, 462 F.2d 712, 718-719

(5th Cir. 1972), affg. T.C. Memo. 1970-182; Tyler v. Tomlinson,

414 F.2d 844, 848 (5th Cir. 1969); Berkowitz v. United States,

411 F.2d 818 (5th Cir. 1969); Montclair, Inc. v. Commissioner,

318 F.2d 38, 40 (5th Cir. 1963), affg. T.C. Memo. 1962-10;

American Offshore, Inc. v. Commissioner, 97 T.C. 579, 602 (1991).

We decide how much weight to give to each of these factors

based on the facts and circumstances of each case. Estate of

Mixon v. United States, supra; see John Kelley Co. v.

Commissioner, 326 U.S. 521, 530 (1946). Our task is not to count

factors, but to evaluate them. Slappey Drive Indus. Park v.

United States, supra at 581. 

C. Substance vs. Form

A payment for which a taxpayer seeks a deduction must have

economic substance. Gregory v. Helvering, 293 U.S. 465 (1935);

United States v. Wexler, 31 F.3d 117, 124 (3d Cir. 1994);

Krumhorn v. Commissioner, 103 T.C. 29, 48 (1994).

The substance of a transaction and not the form controls,

especially where the nominal debtor and the nominal creditor are

jointly controlled. Road Materials, Inc. v. Commissioner, 407

F.2d 1121, 1124 (4th Cir. 1969), affg. on this issue, vacating
- 55 -

and remanding T.C. Memo. 1967-187. If a transaction is

controlled by related entities, the form and labels used may not

signify much because the parties can mold the transaction to

their will. See Anchor Natl. Life Ins. Co. v. Commissioner, 93

T.C. 382, 407 (1989). 

Petitioners contend that the transactions at issue were

negotiated and executed at arm's length and that LTL and DeGroote

and his management team did not control LIIBV and petitioners. 

We disagree that the transactions were at arm's length. DeGroote

and his management team controlled all of the Laidlaw entities,

including petitioners and LIIBV. 

Petitioners contend that LIIBV lent money to petitioners

that it had received as interest income under separately

negotiated arm's-length transactions. We disagree. The LTL

management group controlled petitioners and LIIBV. The existence

of a common chair, directors, officers, and core management team,

and the fact that there were related entities with interlocking

directorates, all indicate that the transactions at issue were

not negotiated at arm's length.

DeGroote and his management team developed and implemented

an elaborate plan to transfer funds between the Laidlaw entities. 

For example, by letter dated October 16, 1986, Haworth directed

LIIBV to change the terms governing the advances to U.S.

subsidiaries and make those changes effective "as of" September

1, 1986. LIIBV did exactly what Haworth directed. LIIBV could
- 56 -

have sued, but did not, to enforce the agreements. LIIBV

repeatedly extended the due date for payments. LIIBV returned

most of the money to petitioners on the same day that it received

payments from petitioners. These facts show that LIIBV did what

LTL and DeGroote and his management team wanted, and did not deal

at arm's length.

Petitioners contend that the fact that the public owned 21

percent of the stock of LII shows that LII dealt at arm's length

with LIIBV. We disagree. The public owned 21 percent of LII

stock before December 16, 1987, but did not own any LII stock

thereafter. DeGroote and his core management team controlled

petitioners throughout the years in issue. 

Petitioners contend that DeGroote sought independent

directors and that Ferrill was independent. Petitioners point

out that Ferrill convinced DeGroote to increase the repurchase

price of publicly-owned LII stock and that Ferrill was on a

special committee to review financing proposals to pay for the

GSX acquisition, which petitioners contend shows that Ferrill is

independent. We disagree that these facts establish that the

Laidlaw entities dealt at arm's length. DeGroote loyalists

controlled the Laidlaw entities, including boards of which

Ferrill was a member. 

Petitioners point out that LIIBV had foreign directors. 

This fact does not convince us that petitioners dealt with LIIBV

at arm's length. Haworth's October 16, 1986, letter to LIIBV,
- 57 -

the October 20, 1986, minutes of LIIBV's board of directors, and

the entire record show that LIIBV followed DeGroote's and his

core management team's instructions. 

Petitioners point out that the LIIBV board revised some of

the documents that Haworth and Cairns had authored. For example,

Haworth changed the grid system promissory note required by his

October 16, 1986, letter to LIIBV. Despite this, the foreign

directors were clearly subordinate to DeGroote and his management

team. 

We conclude that petitioners, LIIBV, and LTL acted in

concert with DeGroote and his core management team and not at

arm's length. The form and the labels used for the transaction

may signify little when the parties to the transaction are

related. Calumet Indus. Inc. v. Commissioner, 95 T.C. 257, 286

(1990); Malone & Hyde, Inc. v. Commissioner, 49 T.C. 575, 578

(1968).

The fact that the dealings between LTI, LII, and their

subsidiaries, and LIIBV were not at arm's length requires that we

give less weight to the Mixon factors relating to the form of the

transaction than to substance. See Gregory v. Helvering, 293

U.S. 465 (1935); Texas Farm Bureau v. United States, 725 F.2d at

312; Estate of Mixon v. United States, supra at 407; Tyler v.

Tomlinson, supra at 850; Road Materials, Inc. v. Commissioner,

supra at 1124. 
- 58 -

D. The Mixon Factors

1. The Name Given to the Certificates Evidencing the

Advances

The name given to the certificates evidencing the advances

suggests whether advances are debt or equity. Estate of Mixon v.

United States, supra at 402-403. The labels on the documents

evidencing the advances at issue say that they are debt. 

However, an attempt to characterize a transaction by its labels

may not be well taken in light of the facts and circumstances of

the case. Id. at 404. Labels cannot change equity to debt. 

Gregory v. Helvering, supra; Estate of Mixon v. United States,

supra.

This factor favors treating the LIIBV advances to

petitioners as debt but, as stated at par. II-C, above, we give

less weight here to the form than to the substance of the

transaction.

2. The Presence or Absence of a Fixed Maturity Date

The presence of a fixed maturity date can indicate that an

advance was debt. Estate of Mixon v. United States, supra at

404-405. However, the right to enforce maturity dates may be

meaningless if the parties do not expect the recipient to repay. 

Foresun, Inc. v. Commissioner, 41 T.C. 706, 717 (1964), affd. in

part, modified in part and remanded 348 F.2d 1006, 1009 (6th Cir.

1965); see Slappey Drive Indus. Park v. United States, 561 F.2d

at 583 & n.18; Harlan v. United States, 409 F.2d 904, 907 n.4
- 59 -

20 Some agreements were demand loans with no maturity dates.

(5th Cir. 1969). Postponing maturity dates for prolonged periods

suggests that the nominal lender does not intend to require

repayment and that the transfers are equity. Slappey Drive

Indus. Park v. United States, supra; Harlan v. United States,

supra; Foresun, Inc. v. Commissioner, supra.

Most of the agreements had fixed maturity dates.20 However,

LIIBV's directors did not intend to request repayment. LIIBV

continually extended and never enforced loan maturity dates. 

The fixed maturity dates in the documents appear to be

window dressing to make the form of the transaction look like

debt. We give more weight to the substance of the transactions

than to the fact that the documents provided for fixed maturity

dates. Tyler v. Tomlinson, supra at 850. We are not bound by

the language of an agreement if it is at odds with the substance

of the transaction. Frank Lyon Co. v. United States, 435 U.S.

561, 573 (1978); Tyler v. Tomlinson, supra at 849. The Laidlaw

entities, including LIIBV and petitioners, adhered to the form of

the contracts by postponing maturity dates, but did not adhere to

the maturity dates in substance. 

The initial loan agreements with LIIBV provided for a fixed

maturity date of September 1, 1988. The "as of" September 1,

1986, agreements changed the fixed maturity date to payment on

demand. Provision for payment on demand without a fixed maturity
- 60 -

date may indicate that an advance is equity. Estate of Mixon v.

United States, supra at 405; Dillin v. United States, 433 F.2d

1097, 1101-1102 (5th Cir. 1970).

Petitioners contend that this factor should not weigh

against them merely because they refinanced the LIIBV loans.

Petitioners contend that refinancings are a common banking

practice. Petitioners rely on Green Bay Structural Steel, Inc.

v. Commissioner, 53 T.C. 451, 457 (1969). We disagree. In Green

Bay Structural Steel, we decided that refinanced subordinated

notes were bona fide indebtedness for which the taxpayer could

deduct interest. That is not the case here. Also, there was no

evidence that there was a circular flow of funds in Green Bay

Structural Steel. See par. II-D-10, below.

Petitioners contend that the payment on demand feature does

not suggest that the advances were equity here because the LIIBV

directors were independent from LTL, and they controlled whether

a demand for payment would be made. We disagree as discussed at

par. II-C, above. This factor supports treating the LIIBV

advances to petitioners as equity. 

3. The Source of Payments, i.e., Whether the Recipient of Funds

Can Repay the Advance With Reasonably Anticipated Cash-Flow

or Liquid Assets

An advance is more likely to be equity if the recipient does

not have liquid assets or reasonably anticipated cashflow from
- 61 -

21 This factor is somewhat anomalous because most loans are

repaid out of earnings. Estate of Mixon v. United States, 464

F.2d 394, 405 n. 15 (5th Cir. 1972).

which to repay. Estate of Mixon v. United States, supra at 405;21

Segel v. Commissioner, 89 T.C. 816, 830-831 (1987).

Petitioners contend that they had enough cash and liquid

assets to pay interest or principal on the $975,153,806 that they

owed to LIIBV on August 31, 1988, and to continue operations. 

Petitioners contend that they had EBITDA of $2.87 billion and

capital contributions of $585 million, less interest payments to

LIIBV and banks of $1.3 billion, for a total cash-flow of $2.9

billion to repay the $975,153,806. We disagree. 

Petitioners' liquid assets and cash-flow were insufficient

to pay the interest or the principal balance. LTI's and LII's

cash-flow ((EBITDA - CAPEX) and (EBITDA - CAPEX)/Interest)) for

each of the 3 years in issue were negative (from negative

$3,177,391 to negative $351,973,233). Petitioners could not

repay the advances with their liquid assets. Transit from 1985

to 1988 and Tree in 1987 and 1988 had negative tangible net

worth. By the last year in issue, LII's tangible net worth was

negative $22,630,000, and LTI's tangible net worth was negative

$58,027,000.

Petitioners allege that use of EBITDA minus CAPEX as a

measure of available cash-flow is incorrect because petitioners

could defer spending capital. We disagree. To repay
- 62 -

$975,153,806 of principal from July 1987 to May 1994 and to pay

interest, petitioners would have had to stop buying companies and

capital assets. It would be difficult or impossible for LTI or

LII to survive if they significantly reduced or eliminated their

capital spending. 

Petitioners contend that they had many sources from which to

repay LIIBV. Petitioners contend that they could have sold

tangible and intangible (e.g., licenses, permits, and goodwill)

assets, or refinanced the LIIBV loans with their operational

cash-flow. This argument misconstrues this factor, which

requires that we consider whether petitioners could repay the

advances with reasonably anticipated cash-flow or liquid assets.

Petitioners sold their solid waste business in 1996 for $1.2

billion and bought a health transportation business. Petitioners

contend that this sale shows that their intangible assets had

substantial value during the years in issue. This argument is

unconvincing. Even if petitioners' intangible assets had

substantial value during the years in issue, we doubt that

petitioners could have operated their business without those

assets.

Petitioners contend that they could have extended the due

dates for repaying the $975,153,806, and that they did not need

to repay that amount in 7 years. Petitioners point out that

Robert T. Jacobs (Jacobs), their banking expert, testified that

it was not unusual during the 1980's to extend loans for 12-18
- 63 -

year terms for leveraged buyouts. We are not convinced by that

testimony. First, petitioners' commercial loans during the years

in issue were generally for 5 years. Second, leveraged buyouts

typically require the borrower to provide a security interest in

its assets, and are subject to financial covenants which impose

severe restrictions unlike the LIIBV advances. 

This factor supports treating the LIIBV advances to

petitioners as equity. 

4. Whether the Provider of the Funds Has the Right to

Enforce Payment of Principal and Interest

A definite obligation to repay an advance suggests that the

advance is a loan. Estate of Mixon v. United States, supra; see

Campbell v. Carter Found. Prod. Co., 322 F.2d 827, 832 (5th Cir.

1963). The documents evidencing the LIIBV advances showed that

LIIBV had a right to enforce payment of principal and interest. 

Petitioners contend that these loan agreements are significant

because they were legally binding. We disagree because LIIBV and

petitioners did not enforce any of the loan agreements. The fact

that the agreements may have been legally binding counts for

little if, as here, the parties understood that they would never

be enforced. As discussed at par. II-D-3, above, the right to

enforce payment may be meaningless if the parties do not expect

the recipient to repay.

This factor supports treating the LIIBV advances to

petitioners as equity. 
- 64 -

5. Whether the Provider of the Advance Gains an Increased

Right To Participate in Management

If, as a result of an advance of funds, the provider of the

funds has an increased right to participate in the management of

the recipient, then it is acting more like a shareholder than a

creditor. Estate of Mixon v. United States, supra at 406. The

documents evidencing the advances did not give LIIBV any right to

participate in the management of the borrowers or the guarantors. 

However, this would have been unnecessary because LTL and its

core management team already controlled LIIBV and petitioners.

This factor is neutral.

6. The Status of the Contribution in Relation to Regular

Creditors

Whether an advance is equal or subordinate to the claims of

regular corporate creditors affects whether the taxpayer was

dealing as a shareholder or creditor. Estate of Mixon v. United

States, supra.

Petitioners point out that Haworth testified that LIIBV did

not subordinate or postpone petitioners' repayment to it. 

Petitioners contend that the LIIBV loans to Transit and Tree

(guaranteed by LTI) were not subject to subordination or

postponement agreements. Petitioners contend that, although LTL

entered into postponement agreements in favor of RBC and BBC in

November 1986, these agreements did not affect LIIBV's legal

rights under its loans to LWSI. Petitioners contend that the

postponement agreements were not subordination agreements under
- 65 -

Canadian law because the intent of the parties in entering into

the agreements was not to subordinate LTL's rights to the rights

of RBC, BBC, or any other third-party creditor; LIIBV was not a

party to the postponement agreements; the parties did not intend

the agreements to be subordination agreements; and the

postponement agreements were not enforceable as unregistered

securities.

Petitioners' arguments do not convince us to disregard the

postponement agreements for purposes of applying this factor. 

The postponement agreements were effective immediately and

provided that Canadian law applied. LTL signed on behalf of its

subsidiaries and agreed to make transfers, deliver assignments

and documents, and do all acts necessary to implement the

agreements. Petitioners' commercial banks relied on the

agreements. Petitioners point out that E. Alan Peters (Peters),

petitioners' Canadian banking law expert, testified that the

postponement agreements were not subordination agreements under

Canadian law. However, Peters also testified that the

postponement agreements were enforceable under Canadian law, and

that they subordinated one creditor's right to payment to that of

another creditor. 

Petitioner contends that the postponement agreements had

less effect than inchoate subordination agreements. Petitioners

make too much of this point because the postponement agreements,
- 66 -

even if inchoate, increased LIIBV's risk. See United States v.

Snyder Bros. Co., 367 F.2d 980, 981, 984-985 (5th Cir. 1966).

Failure to demand timely repayment effectively subordinates

intercompany debt to the rights of other creditors who receive

payment in the interim. American Offshore, Inc. v. Commissioner,

97 T.C. 579, 603 (1991); Inductotherm Indus., Inc. v.

Commissioner, T.C. Memo. 1984-281, affd. without published

opinion 770 F.2d 1071 (3d Cir. 1985). LIIBV's postponement of

repayments by petitioners effectively subordinated what

petitioners contend is debt to LIIBV.

The question before us is whether the advance has a status

equal or inferior to the claims of a regular corporate creditor. 

Estate of Mixon v. United States, supra. We conclude that the

postponement agreements and the effective subordination as a

result of failing to demand repayment made the obligations to

repay LIIBV inferior to the claims of petitioners' regular

corporate creditors. Thus, this factor supports treating the

LIIBV advances to petitioners as equity. 

7. Intent of the Parties

The intent of the parties is important in deciding whether

payments are debt or equity. Petitioners contend that they

intended their payments to LIIBV to be interest. Petitioners

rely primarily on the evidence showing the form they used for the

transactions at issue. More weight is given to objective facts
- 67 -

than to stated intent. In re Lane, 742 F.2d 1311 (11th Cir.

1984). The Court of Appeals for the Fifth Circuit has said:

Primary reliance upon subjective indications of intent

is simply not an effective way of resolving * * * [the

debt versus equity] problem. In a land of hard

economic facts, we cannot root important decisions in

parties' pious declarations of intent. * * *

Texas Farm Bureau v. United States, 725 F.2d at 314. Thus, to

reveal a taxpayer's intent, we must consider not only the

pronouncements of the parties, but also the circumstances

surrounding the transaction. Tyler v. Tomlinson, 414 F.2d at

850.

Petitioners referred to the advances as loans, and surely

wanted the advances to be treated as loans; however, that is not

the same as intending the advances to be loans. Despite

petitioners' worsening finances, LIIBV made large advances,

extended the terms for payment, and did not seek security in the

written agreements. Petitioners did not intend in substance to

pay interest; they intended LIIBV to advance funds whenever

interest was due. Petitioners intended LIIBV to continue to

advance funds with no expectation that petitioners would repay. 

LTL represented to Canadian tax officials that the loans are "in

the nature of capital contributions". This factor supports

treating the LIIBV advances to petitioners as equity. 
- 68 -

8. Whether the Recipient of the Advance Is Adequately

Capitalized

a. Capitalization of Petitioners

Inadequate capitalization strongly suggests that an advance

is equity if: (a) The debt to equity ratio was initially high,

(b) the parties realized that it would likely go higher, and (c)

the recipient of the funds used a substantial part of the funds

to buy capital assets and to meet expenses needed to begin

operations. Estate of Mixon v. United States, supra at 408;

United States v. Henderson, 375 F.2d 36, 40 (5th Cir. 1967). 

Courts generally consider a borrower's debt to equity ratio and

other financial data in deciding if it is thinly capitalized. 

See, e.g., Tyler v. Tomlinson, supra at 848-849.

The GSX purchase made petitioners' debt to equity ratio high

during the first year in issue which ended August 31, 1986. 

Petitioners contend that they were not thinly capitalized. They

contend that both their and respondent's experts testified that

they were not thinly capitalized and that their financial

condition was as good as their competitors. We disagree. 

Petitioners' debt to equity ratio worsened after buying GSX

because they continued to receive advances from LIIBV. 

Petitioners used most of the advances from LIIBV to pay capital

expenses such as to acquire more businesses.

Theresa Poppei (Poppei), petitioners' expert, and David N.

Fuller (Fuller), respondent's expert, testified about
- 69 -

petitioners' value during the years in issue. Petitioners' other

experts used Poppei's values and conclusions to evaluate

petitioners' financial condition, including capitalization. 

Poppei testified that LII's financial performance was better than

WMI's and BFI's. However, her peer group financial performance

charts show that WMI and BFI performed better financially than

petitioners did. These charts are corroborated by petitioners'

credit analyst, Carol Verschell, who said in her expert report

that the debt to equity ratios for BFI and WMI were superior to

petitioners'.

b. Use of Fair Market Values To Compute Debt to

Equity Ratios

Petitioners contend that we should use fair market values

and not book values to compute debt to equity ratios. 

Petitioners point out that Jacobs testified that there is an

"increasing focus on market value of equity versus book equity in

analyzing capital structure" especially in the leveraged buyout

market, and that he concluded that petitioners were adequately

capitalized. Jacobs also testified that investment bankers

provided funds for highly-leveraged transactions based on cashflow.

We disagree. As discussed at pars. I-H-2 and II-D-3, above,

petitioners' cash-flow was poor. The leverage ratios and

coverage ratios in petitioners' loan agreements were based on

book values. None of the loan documents stated that the leverage
- 70 -

or coverage ratios were based on fair market values. Banks which

made commercial loans to petitioners generally determined

financial ratio requirements by referring to the book values of

the Laidlaw borrowers and guarantors. 

Petitioners contend that it is well established that a

borrower's debt to equity ratio is based on the fair market value

of its assets, citing Dillin v. United States, 433 F.2d 1097,

1102 (5th Cir. 1970). We disagree with petitioners' reading of

Dillin. In that case, the fund recipient's debt to equity ratio

was 800 to 1 based on book value and 2.5 to 1 based on fair

market value. The Court of Appeals for the Fifth Circuit

affirmed the district court's decision that the advance was

equity. Even if we considered fair market value debt to equity

ratios, petitioners fare no better because their debt to equity

ratios were worse than those of their competitors using either

book or fair market values. See also Slappey Drive Indus. Park

v, United States, 561 F.2d at 579, 584-585 n.22 (discussing but

not deciding whether fair market values are relevant in deciding

whether capitalization is adequate). 

c. Whether To Consider Only Debt and Equity

Related to Capital Assets To Start Operations

Petitioners contend that, in applying this factor, Estate of

Mixon v. United States, supra at 408, requires that we consider

only debt and equity related to capital assets needed to start

operations. We disagree. Estate of Mixon v. United States,
- 71 -

supra, did not involve the start of an operation; it involved

advances to a bank that had suffered a large embezzlement loss. 

Courts consider capital costs other than costs to start a

business in deciding whether a corporation is inadequately

capitalized. E.g., Plantation Patterns, Inc. v. Commissioner,

462 F.2d at 722; Tyler v. Tomlinson, 414 F.2d at 848-850; C.M.

Gooch Lumber Sales Co. v. Commissioner, 49 T.C. 649, 657 (1968);

Foresun, Inc. v. Commissioner, 41 T.C. at 717. 

d. Debt to Equity Ratios of LTI and LII as Guarantors

Petitioners contend that we should take into account LTI's

and LII's debt to equity ratios because they were guarantors. 

Even if we agreed, it would not affect our analysis. LTI's debt

to equity ratios were 2.26 for 1986, 5.78 for 1987, and 5.63 for

1988. LTI's debt to equity ratio averaged 4.56 and exceeded 2 to

1 for each of the years in issue. LII's debt to equity ratios

were .67 for 1986, 3.54 for 1987, and 8.43 for 1988. LII's debt

to equity ratio averaged 4.21 and exceeded 2 to 1 for the last 2

of the 3 years in issue. LTI's and LII's debt to equity ratios

generally worsened each year in issue.

Petitioners point out that Michael J. Kennelly (Kennelly),

petitioners' accounting expert, stated that LTI's and LII's debt

to equity ratios were acceptable. However, he used incorrect

assumptions in his debt to equity ratio calculations. Kennelly

relied on Poppei's conclusions of value. We are not persuaded by

Poppei's conclusions. Poppei unrealistically assumed that
- 72 -

petitioners would have zero capital expenditures for landfills

and buildings during the 10 years that she considered. We

believe that assumption is unrealistic because waste companies

must incur a substantial amount of capital expenditures to

develop landfills and acquire other assets in the normal course

of operations. Poppei's market value approach erroneously

assumed LII's invested capital would increase by 17.9 percent in

the year ending August 31, 1988, while the invested capital of

WMI decreased 2 percent and BFI decreased 4 percent. 

Fuller's calculations were also incorrect because he should

have applied, but did not apply, a minority discount for LII's

minority interest (which Poppei properly did). He did not

compute financial ratios for LII, and his ratios for LTI did not

include adjustments for the LII minority interest. 

e. Conclusion

We conclude that petitioners were thinly capitalized. This

factor supports treating the LIIBV advances to petitioners as

equity. 

9. Identity of Interest Between Creditor and Shareholder

If advances by shareholders are proportionate to their stock

ownership, the advances are more likely to be equity. Estate of

Mixon v. United States, supra at 409; Tomlinson v. 1661 Corp.,

377 F.2d 291 (5th Cir. 1967); Leach Corp. v. Commissioner; 30

T.C. 563, 579 (1958). 
- 73 -

Petitioners contend that this factor supports treating the

LIIBV advances to them as debt because LIIBV did not own any

stock of petitioners. We disagree. The fact that LIIBV did not

own stock of petitioners is insignificant because LTL, through

DeGroote and his core management team, controlled petitioners and

LIIBV. See Plantation Patterns, Inc. v. Commissioner, supra;

Foresun, Inc. v. Commissioner, supra.

Petitioners contend that the LIIBV advances were freely

transferable. They rely on Tomlinson v. 1661 Corp., supra at

297, in which the Court of Appeals for the Fifth Circuit said

that if a debenture is freely transferable, the proportional

participation and control factor does not apply. Even if

petitioners were correct on this point, the result would be that

we would treat this factor as neutral. 

Petitioners contend that this factor should be given little

weight with respect to LWSI before December 1987 because about

half of LII's shares were then publicly held. We disagree that

the fact that some of LII's stock was publicly held helps

petitioners. First, LII's directors had reason to approve the

LIIBV advances because LII could not get financing from

commercial lenders with terms more favorable to LWSI and LII than

they could get from LIIBV. Second, LII's brief period with

minority shareholders and independent directors did not mean it

dealt with LIIBV at arm's length.
- 74 -

22 We could also conclude that this factor supports treating

the LIIBV advances to petitioners as equity because LIIBV and

petitioners are indirectly held by LTL, and thus 100 percent of

the advances came from petitioners' 100-percent owners. This

suggests that LIIBV and petitioners had an identity of interest. 

Harmont Plaza, Inc. v. Commissioner, 64 T.C. 632, 645 (1975),

affd. 549 F.2d 414 (6th Cir. 1977); see Rickey v. United States,

592 F.2d 1251, 1257-1258 (5th Cir. 1979) (discussing attribution

rules of sec. 318).

23 Respondent relied on these facts in arguing that sec.

267(a)(3) applies. Petitioners did not dispute respondent's

contention that there was a circular flow of funds.

This factor is neutral.22

10. Source of Interest Payments, i.e., Whether the

Recipient of the Funds Pays Interest From Earnings

Payment of interest by the recipient of an advance suggests

that a transfer is debt. Estate of Mixon v. United States,

supra. 

Petitioners contend that they paid all of the interest due

to LIIBV in the amounts and on the dates required by the loan

agreements and promissory notes, and that they paid the interest

at issue. We disagree. LIIBV usually paid one of the three

operating companies (Transit, Tree, and LWSI) on the same day and

often in the same amount of the payments that LIIBV had received

that day. Petitioners' payments to LIIBV did not change

petitioners' financial position because LIIBV immediately

returned the vast majority of funds to petitioners as interest

reinvestment loans. In substance, petitioners paid interest to

LIIBV at most sporadically because funds flowed in a carefully

orchestrated circle.23
- 75 -

Transit's and LWSI's payments to LIIBV which they contend

are interest are similar to the payments in Merryman v.

Commissioner, 873 F.2d 879, 882 (5th Cir. 1989), affg. T.C. Memo.

1988-72; see also Bail Bonds by Marvin Nelson, Inc. v.

Commissioner, 820 F.2d 1543, 1549 (9th Cir. 1987), affg. T.C.

Memo. 1986-23; United States v. Clardy, 612 F.2d 1139, 1151-1152

(9th Cir. 1980); Zirker v. Commissioner, 87 T.C. 970, 976 (1986);

Drobny v. Commissioner, 86 T.C. 1326, 1343 (1986). affd. 113 F.3d

670 (7th Cir. 1997); Karme v. Commissioner, 73 T.C. 1163,

1186-1187 (1980), affd. 673 F.2d 1062 (9th Cir. 1982), in that

the payments did not change petitioners' economic status.

Petitioners contend that these cases are indistinguishable

from Nestle Holdings, Inc. v. Commissioner, T.C. Memo. 1995-441. 

We disagree. The taxpayer in that case paid interest and reduced

its overall indebtedness during the years in issue, and its

financial condition was improving. Here, petitioners postponed

interest payments, used debt to finance interest payments, and

continued to increase their indebtedness. In addition, the funds

recipient in Nestle, unlike petitioners, was not highly

leveraged, had reasonably anticipated significant cash-flows

adequate to pay interest and principal, and had liquid assets

which it would use to reduce its indebtedness.

Petitioners contend that their interest reinvestment loans

were merely a device to help LIIBV comply with Dutch tax rulings. 

We disagree. Whether or not the interest reinvestment loans had
- 76 -

that effect, they meant that, in substance, petitioners paid no

interest to LIIBV.

This factor supports treating the LIIBV advances to

petitioners as equity. 

11. Ability of the Corporation To Obtain Loans From Outside

Lending Institutions

If a corporation can borrow money from outside sources when

it receives a transfer of funds, the transfer is more likely to

be debt. Estate of Mixon v. United States, supra at 410;

Tomlinson v. 1661 Corp., supra. 

Petitioners contend that they could have borrowed

$975,153,806 from outside sources during the years in issue on

commercially reasonable terms. To support their position,

petitioners cite the testimony of Jacobs, petitioners' expert

Hollis W. Rademacher (Rademacher), and three letters from

investment bankers. 

Rademacher testified that a bank would not have required the

loans to be secured, but that a negative pledge or prohibition

against other indebtedness for borrowed money would have

sufficed. In contrast, respondent's expert, Filmore G. Enger,

Jr. (Enger), testified that security would be very important for

loans of this magnitude. We think Enger's view was more

realistic. Generally speaking, creditors avoid subjecting funds

to the risk of the borrower's business as much as possible and

seek a reliable return, while shareholders take that risk and

hope for a return from the business' success. Slappey Drive
- 77 -

Indus. Park v. United States, 561 F.2d at 581; Jewell Ridge Coal

Corp. v. Commissioner, 318 F.2d 695, 698 (4th Cir. 1963), affg.

T.C. Memo. 1962-194. Rademacher's position would subject the

creditor to undue risk.

Jacobs testified that it would have been possible for

petitioners to get large loans. However, he said that loans this

size would require security because petitioners were highly

leveraged. He cited examples of large bank loans made to highlyleveraged companies during the years in issue. However, those

examples are not compelling here because those loans were to

companies that were much larger than petitioners, and they

included various security arrangements including guaranties, as

here. Jacobs concluded that it was not clear that LTI and LII

could have borrowed as much from commercial banks as they

received from LIIBV. He said they might have been able to borrow

large amounts if they first had a public offering of subordinated

debt. 

Petitioners contend that Enger testified that petitioners

could have obtained bank financing in the amounts that LIIBV

advanced to petitioners. We disagree. Enger testified that

petitioners could not obtain bank financing from commercial

lenders on terms comparable to the LIIBV agreements, and could

obtain financing only by using equity and subordinated and senior

indebtedness. 

Petitioners contend that the three investment bankers'

proposals show that they could have reasonably obtained
- 78 -

$975,153,806. We disagree. The investment bankers did not

propose to raise $975,153,806. Dean Witter proposed to use

subordinated notes to raise $325 million. Bear Stearns proposed

to raise $300 million ($100 million subordinated debt, $100

million stock sale, and $100 million convertible subordinated

debentures). Donaldson, Lufkin & Jenrette proposed to raise up

to $350 ($80 million from common stock, $100 million from

convertible debentures, and $170 million from subordinated debt). 

The investment bankers' proposals relied on equity financing

which petitioners could not do. 

Petitioners contend that the debt to equity ratios in their

loan agreements with the banks were not important because they

were waivable. We disagree. Even if a term in the written

agreements could be waived, that does not make that term

unimportant.

Petitioners contend that RBC, TDB, and FNBC would have lent

them $975,153,806. Petitioners rely on DeGroote's testimony that

he had good relations with those banks. DeGroote testified that

commercial lenders inundated LTL with offers to lend petitioners

funds and that RBC, TDB, and FNBC had banking relationships with

LTL. His general testimony on this point does not convince us

that they would have lent petitioners as much as LIIBV did.

Haworth testified that petitioners could have borrowed money

from commercial lenders based on petitioners' regular contacts

with LTL's banks. Rademacher and Jacobs testified that they

would have lent as much money to petitioners as LIIBV did. The
- 79 -

objective evidence does not corroborate their testimony on this

point. Petitioners' loans from commercial banks totaled much

less than $975,153,806, and were on terms substantially less

favorable than the agreements accompanying petitioners' advances

from LIIBV. 

 Petitioners could have borrowed some money from outside

lenders. However, we do not think that they could have borrowed

$975,153,806, or that they could have done so on terms close to

the favorable terms that they received from LIIBV. This factor

supports treating the LIIBV advances to petitioners as equity.

12. The Extent to Which the Recipient Used the Advance To

Acquire Capital Assets

A corporation's use of cash advances to acquire capital

assets suggests that an advance is equity. Estate of Mixon v.

United States, 464 F.2d at 410. Use of an advance by an ongoing

business to expand its operations, e.g., by acquiring an existing

business, suggests that the advance is equity. Plantation

Patterns, Inc. v. United States, 462 F.2d. at 713-716, 722; Tyler

v. Tomlinson, 414 F.2d. at 846, 848-849. 

Petitioners used most of the advances from LIIBV to expand

their operations, especially by acquiring other companies, e.g.,

GSX. Petitioners told Canadian tax authorities that LTL's

advances to U.S. subsidiaries through LIIBV were capital

investments which formed a part of the subsidiaries' permanent

capital. 
- 80 -

Petitioners contend that this factor applies only to capital

expenses for the initial operations of a business. Petitioners

rely on Slappey Drive Indus. Park v. United States, supra at 583. 

Most of the advances in that case were used to finance the

initial operations of a business. Id. However, the Court of

Appeals for the Fifth Circuit did not hold in that case that an

advance must be used to buy capital assets for a new business for

it to be treated as equity.

This factor supports treating the LIIBV advances to

petitioners as equity.

13. Whether the Recipient Repaid the Funds on the Due Date

The failure of a corporation to repay principal amounts on

the due date indicates that advances were equity. Estate of

Mixon v. United States, supra; see Slappey Drive Indus. Park v.

United States, supra at 582. LIIBV repeatedly deferred and

extended the vast majority of principal payments.

Petitioners contend that extending the due date is the same

as repaying on the due date. Petitioners cite Litton Bus. Sys.

Inc. v. Commissioner, 61 T.C. 367 (1973), and C.M. Gooch Lumber

Sales Co. v. Commissioner, 49 T.C. at 657. Those cases differ

from the instant case. Litton Bus. Sys. Inc. v. Commissioner,

supra, differs because in that case the recipient of funds

continuously repaid principal which substantially reduced the net

debt. Id. at 374-375, 380-381. In Litton Bus. Sys., we found a

reasonable expectation of repayment not present in the instant

cases. Petitioners' account balances increased throughout the
- 81 -

years in issue, and LIIBV continued to make advances to

petitioners despite their eroding financial conditions and their

inability to repay the advances outstanding within a reasonable

time period. See Atlanta Biltmore Hotel Corp. v. Commissioner,

349 F.2d 677, 680 (5th Cir. 1965), modifying and affg. T.C. Memo.

1963-255; Diamond Bros. Co. v. Commissioner, 322 F.2d 725, 732

(3d Cir. 1963), affg. T.C. Memo. 1962-132; American-La FranceFoamite Corp. v. Commissioner, 284 F.2d 723, 724-725 & n.3 (2d

Cir. 1960), affg. T.C. Memo. 1959-101. 

In C.M. Gooch Lumber Sales Co. v. Commissioner, supra at

657-659, the parties had an arrangement which provided for

mutually offsetting business dealings, but assured repayment of

principal. We found that until June 1960 the advances were debt,

but after that date, repayment was unlikely and the advances were

equity. Id. Here, there was no assured repayment during the

years in issue.

This factor supports treating the LIIBV advances to

petitioners as equity. 

E. Other Factors

1. Issuance of Debt for Cash

Petitioners contend that the fact that Transit, Tree, and

LWSI transferred cash to LIIBV instead of stock supports treating

the LIIBV advances to petitioners as debt. Petitioners cite

Commissioner v. John Kelley Co., 146 F.2d 466, 469 (7th Cir.

1944) (debentures sold to shareholders in exchange for credit of

dividends paid were not debt), revg. 1 T.C. 457 (1943), revd. 326
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U.S. 521 (1946). We disagree. The Court of Appeals for the

Seventh Circuit held in Commissioner v. John Kelley Co., supra,

that the fact that the taxpayers did not exchange cash for

debentures is a factor indicating that an advance is equity. Id.

at 467. However, the Court of Appeals for the Seventh Circuit

did not state that the converse is true; i.e., that if the

recipient of funds received any cash, the transaction is a loan. 

The fact that LIIBV transferred cash to petitioners is not

convincing evidence that the advances were debt.

This factor is neutral.

2. Reasonable Expectation of Repayment

A reasonable expectation of repayment by the provider of an

advance when the advance is made suggests that the advance is

debt. Gilbert v. Commissioner, 248 F.2d 399, 406 (2d Cir. 1957),

remanding T.C. Memo. 1956-137; C.M. Gooch Lumber Sales Co. v.

Commissioner, supra at 656; Nestle Holdings, Inc. v.

Commissioner, T.C. Memo. 1995-441. Petitioners contend that

LIIBV reasonably expected petitioners to repay all of the loans

based on their financial conditions. We disagree. LIIBV's

directors did not expect to be repaid or intend to request

repayment. 

This factor suggests treating the LIIBV advances to

petitioners as equity.

3. Absence of Conversion Rights

Petitioners point out that they had no right to convert the

creditor's loans to stock of the debtor, and contend that this
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suggests that the advances were not equity, citing Rev. Rul. 83-

98, 1983-2 C.B. 40; Notice 94-47, 1994-1 C.B. 357; Notice 94-48,

1994-1 C.B. 357. This factor is not significant because LTL

owned and controlled petitioners and LIIBV. LTL had the power to

cause LIIBV to convert advances to petitioners to stock.

This factor is neutral.

F. Conclusion

The factors that relate to the form of the transaction

support treating the LIIBV advances to petitioners as debt. The

factors relating to substance support treating the LIIBV advances

to petitioners as equity. The substance of the transactions is

revealed in the lack of arm's-length dealing between LIIBV and

petitioners, the circular flow of funds, and the conduct of the

parties by changing the terms of the agreements when needed to

avoid deadlines. The Laidlaw entities' core management group

designed and implemented this elaborate system to create the

appearance that petitioners were paying interest, while in

substance they were not. 

We conclude that, for Federal income tax purposes, the

advances from LIIBV to petitioners for which petitioners claim to

have paid the interest at issue are equity and not debt. Thus,

petitioners may not deduct the interest at issue for 1986, 1987,

and 1988. 
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To reflect concessions and the foregoing,

Decisions will be

entered under Rule 155.