Opinion ID: 429782
Heading Depth: 2
Heading Rank: 2

Heading: Debt or Capital Contribution--the Objective Factors

Text: 39 Turning to that analysis, we note that three factors point weakly towards debt. Factor one, the names given to the certificates evidencing the indebtedness, suggests debt with respect to $50,000 of the advances. Notes evidenced that amount of the $166,946.02 total. 10 This indicator has little force, however. After the original notes were either lost or destroyed, 11 the parties never issued new notes to replace them. In addition, of the twelve objective Mixon factors, factor one has the largest subjective content. The parties' decision to call the certificates notes sheds little light on the transaction's real substance. In any case, to the limited extent that factor one indicates debt, we find other factors overriding. 40 Factor nine, identity of interest between creditor and shareholder, also weighs lightly in the instant analysis. It applies specifically to the situation where shareholders have advanced funds to their corporation. The focus is on whether a contributing shareholder owns the same proportion of the company's stock as he does of the purported debt. If proportionality exists, how the contributor breaks down the advance between debt and equity will not affect control of the company. See Slappey Drive Ind. Park v. United States, supra, 561 F.2d at 583. In such circumstances tax considerations may well be the primary force in the contributor's characterization of the transaction. Strictly speaking, the factor does not apply to the case at bar, one involving an advance between two non-profit corporations. The underlying notion of identity of interest does have relevance, however. A complete identity of interests would exist between TFB as creditor and TFB as representative of TAMDA's members if the two organizations had identical memberships. Because TAMDA's members comprise only a subgroup of TFB's members, symmetry of interests is incomplete. The factor thus cuts somewhat in favor of a finding of debt. But, even its limited significance fades in the light of the other factors. 41 Next we observe that the agreement between TFB and TAMDA established a fixed due date for repayment of the advances. Again, however, the circumstances of this case negate this factor's importance. Although the agreement between TAMDA and TFB required repayment of the advances within 30 days of the close of each year, that provision was a dead letter. TFB advanced money to TAMDA year after year, despite TAMDA's failure to comply with the repayment provision. Moreover, the very limited outside financial resources of TFB, 12 coupled with the complete identity between the two organizations' board of directors, makes illusory the notes' payment on demand provisions. See Tyler v. Tomlinson, supra, 414 F.2d at 849. 42 Turning to the remaining, relevant factors, 13 we find that they unwaveringly indicate that the advances were not debt. TAMDA's dependence on its earnings to repay TFB's advances is one illustration. The only documented nonearnings source for repayment of TFB lay in dues paid by TAMDA members. But, given a yearly dues income of only $3,000, 14 TAMDA would have to look elsewhere to repay TFB--i.e., to the commissions it charged for marketing services. Record Vol. I, p. 104. The dependence on membership dues also raises the factor of inadequate capitalization. With such limited resources, TAMDA could hardly have been more thinly capitalized. 43 TFB's right to enforce payment of principal and interest was only a mirage. The agreement signed at TAMDA's inception gave TFB a contractual right to repayment. In actuality, however, repayment fell within TAMDA/TFB management discretion. The complete overlap in the boards of TFB and its affiliate precluded any arms-length relationship--any realistic expectation that a demand for payment would be made or legal enforcement actions would be taken. TFB stipulated in the trial court that it never took formal collection actions against TAMDA despite TAMDA's repeated failures to meet the annual due dates. Record, Vol. I, p. 104. In addition, the advances were de facto subordinated to TAMDA's corporate debt. TAMDA failed to meet its obligations to TFB while still meeting all of its obligations to other creditors. 44 TAMDA's use of the advances also leads us to conclude that they were not debt. TAMDA spent the advances on basic operating costs such as rent, supplies, travel, etc. While the advances were not used to obtain capital assets, the organization wholly depended on the advances to begin functioning. Purchase of such necessary first assets points us away from a finding of debt. Slappey Drive Industrial Park, supra, 561 F.2d at 583. 45 A particularly important indicator in distinguishing debt from capital contributions focuses on interest payments. As this court stated in Curry v. United States, supra, 396 F.2d 634, a true lender is concerned with interest. In this case, the agreement under which TFB advanced $114,118.13 did not call for payment of interest. Even with respect to the interest-bearing $50,000 notes, TAMDA never made a single interest payment. Failure to insist on interest payments clearly demonstrates that TFB was not concerned with interest income. Rather like an equity holder, TFB cared more about the continued operation and growth of TAMDA. See id.; Estate of Mixon v. United States, supra, 464 F.2d at 409.