Opinion ID: 2973623
Heading Depth: 4
Heading Rank: 2

Heading: Written Instruments of the Indebtedness

Text: “The absence of notes or other instruments of indebtedness is a strong indication that the advances were capital contributions and not loans.” Roth Steel, 800 F.2d at 631. In its analysis, the Tax Court found that Indmar “failed to establish that, at the time the transfers were made, it had the 2 The government took pains during trial to show that Indmar could have received a lower interest rate from FTB than its stockholders. Had the 10% rate been exorbitant, this would have been a useful line of inquiry. Under the circumstances here, the rate was not exorbitant, and whether Indmar could have received a better rate through FTB is of no import. To show bona fide debt, a taxpayer does not need to prove that it received the financially optimal rate, just a commercially reasonable one. No. 05-1573 Indmar Prods. Co. v. Comm’r Page 8 requisite unconditional and legal obligation to repay the Rowes (e.g., 3the transfers were not documented).” Indmar, 2005 T.C.M. LEXIS 31, at  (emphasis added). The Tax Court focused on only half the story. For years 1987-1992, the Rowes did make advancements without executing any notes or other instruments. Beginning in 1993, and for all the tax years at issue in this case, the parties executed notes of loans and lines of credit covering all of the advances at issue, as the Tax Court noted in its findings of fact. Yet, in its analysis of the Roth Steel factors, the Tax Court was silent as to the subsequent execution of notes. After-the-fact consolidation of prior advances into a single note can indicate that the advances were debt rather than equity contributions. See, e.g., Dev. Corp. of Am. v. Comm’r, T.C.M. 1988-127, 1988 T.C.M. LEXIS 155, at . The Tax Court erred by focusing4 on the initial lack of documentation without addressing the subsequent history of executed notes.