Indmar Products Co v. CIR

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 06a0133p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Petitioner-Appellant, -
INDMAR PRODUCTS CO., INC.,
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No. 05-1573
v.
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COMMISSIONER OF INTERNAL REVENUE, -
Respondent-Appellee. -
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On Appeal from the United States Tax Court.
No. 03-15428.
Argued: December 6, 2005
Decided and Filed: April 14, 2006
Before: MOORE, ROGERS, and McKEAGUE, Circuit Judges.
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COUNSEL
ARGUED: Matthew P. Cavitch, BOGITAN LAW FIRM, Memphis, Tennessee, for Appellant.
Teresa T. Milton, UNITED STATES DEPARTMENT OF JUSTICE, APPELLATE SECTION TAX
DIVISION, Washington, D.C., for Appellee. ON BRIEF: Matthew P. Cavitch, G. Patrick Arnoult,
BOGITAN LAW FIRM, Memphis, Tennessee, for Appellant. Teresa T. Milton, Richard Farber,
UNITED STATES DEPARTMENT OF JUSTICE, APPELLATE SECTION TAX DIVISION,
Washington, D.C., for Appellee.
McKEAGUE, J., delivered the opinion of the court. ROGERS, J. (pp. 13-16), delivered a
separate concurring opinion. MOORE, J. (pp. 17-19), delivered a separate dissenting opinion.
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OPINION
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McKEAGUE, Circuit Judge. Indmar Products Co., Inc. (“Indmar”) appeals the decision of
the Tax Court to disallow interest deductions the company claimed for tax years 1998-2000, and to
assess accuracy-related tax penalties for those years. The interest deductions relate to a number of
advances made to Indmar by its majority stockholders over several years. Indmar argued at trial that
the advances were legitimate loans made to the company, and thus it could properly deduct the
interest payments made on these advances under 26 U.S.C. § 163(a). The Tax Court, following the
position taken by the Commissioner of Internal Revenue (the “Commissioner”), disagreed,
concluding that the advances were equity contributions and therefore the company could not deduct
any purported interest payments on these advances. The court imposed penalties on Indmar based
on the deductions. Indmar Prods. Co., Inc. v. Comm’r, T.C.M. 2005-32, 2005 T.C.M. LEXIS 31.

1
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 2

Upon review of the record, we conclude that the Tax Court clearly erred in finding the
advances were equity. The Tax Court failed to consider several factors used by this court for
determining whether advances are debt or equity, ignored relevant evidence, and drew several
unsupported inferences from its factual findings. We reverse and find that the stockholder advances
were bona fide debt.
I. BACKGROUND
A. Stockholder Advances to Indmar
Indmar, a Tennessee corporation, is a marine engine manufacturer. In 1973, Richard Rowe,
Sr., and Marty Hoffman owned equal shares of Indmar. In 1987, after Hoffman passed away,
Richard and his wife, Donna Rowe, together owned 74.44% of Indmar, with their children and
children’s spouses owning the rest.
By all accounts, Indmar has been a successful company. From 1986 to 2000, Indmar’s sales
and costs-of-goods sold increased from $5m and $3.9m to $45m and $37.7m, respectively. In
addition, Indmar’s working capital (current assets minus current liabilities) increased from $471,386
to $3.8m. During this period, Indmar did not declare or pay formal dividends.
Since the 1970s, Indmar’s stockholders have advanced funds to it, receiving a 10% annual
return in exchange. Hoffman started the practice in the 1970s. Beginning in 1987, the Rowes (as
well as their children) began to make advancements on a periodic basis. Indmar treated all of the
advances as loans from stockholders in the corporate books and records, and made monthly
payments calculated at 10% of the advanced funds. Indmar reported the payments as interest
expense deductions on its federal income tax returns. Consistent with Indmar’s reporting, the Rowes
reported the payments as interest income on their individual income tax returns.
The parties did not initially document the advances with notes or other instruments.
Beginning in 1993, the parties executed notes covering all of the advances at issue. Specifically,
Indmar executed a promissory note in 1993 with Donna Rowe for $201,400 (i.e., her outstanding
balance). The note was payable on demand and freely transferable, had no maturity date or monthly
payment schedule, and had a fixed interest rate of 10%. In 1995, Indmar executed a similar
promissory note with Richard Rowe for $605,681 (i.e., his outstanding balance). In 1998, when the
outstanding transfers totaled $1,222,133, Indmar executed two line of credit agreements with the
Rowes for $1m and $750,000. The line of credit agreements provided that the balances were
payable on demand and the notes were freely transferable. In addition, the agreements provided a
stated interest rate of 10% and had no maturity date or monthly payment schedule. None of the
advances were secured.
Repayments of the advances were paid on demand, based on the needs of the stockholders,
and not subject to set or predetermined due dates. The record indicates that between 1987 and 2000,
the total advance balances ranged from $634,000 to $1.7m, and Indmar made purported interest
payments between $45,000 and $174,000 each year.
The parties structured the advances as demand loans to give the Rowes flexibility as
creditors. Moreover, as demand loans, the advances were treated by the Rowes as short-term debt
under Tennessee law, thereby excepting interest payments from a 6% state tax on dividends and
interest on long-term debts. Tenn. Code Ann. §§ 67-2-101(1)(B)(i), 67-2-102 (2005). Indmar,
however, reported the advances as long-term liabilities on its financial statements to avoid violating
loan agreements with First Tennessee Bank (“FTB”), its primary creditor, who required a minimum
ratio of current assets to current liabilities.
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 3

In order to reconcile the treatment and execution of the advances as demand loans versus
listing them as long-term debt in its financial reports, Indmar received waivers from the Rowes
agreeing to forego repayment on the notes for at least 12 months. From 1989 to 2000, the notes to
Indmar’s financial statements disclosed that “The stockholders have agreed not to demand payment
within the next year,” and in 1992 and 1993, the Rowes signed written agreements stating that they
would not demand repayment of the advances. Indmar did all of this under the direction of its
accountant.
Despite the annual waivers, the Rowes demanded and received numerous partial repayments
of the advances. Specifically, in 1994 and 1995, Richard Rowe demanded repayment of $15,000
and $650,000, respectively, to pay his taxes and purchase a new home. He also demanded
repayment of $84,948, $80,000, $25,000, and $70,221 from 1997-2000 to pay litigation expenses,
boat repairs, and tax expenses. Donna Rowe demanded repayment of $180,000 in 1998 for boat
repairs. The Rowes made additional advances in 1997 and 1998 of $500,000 and $300,000,
respectively. The balance of notes payable to stockholders on December 31, 2000, totaled
$1,166,912.
As Indmar was a successful, profitable company, numerous banks sought to lend money to
it. FTB worked hard to retain Indmar’s business, made funds immediately available upon request,
and was willing to lend Indmar 100% of the stockholder advances.
In its loan agreements with Indmar, FTB required the company to subordinate all transfers,
including stockholder advances, to FTB’s loans. FTB did not strictly enforce the subordination
provision, however, as Indmar repaid – with FTB’s knowledge – some of the stockholder
advancements at the same time FTB loans remained outstanding. As an example, when Richard
demanded repayment of $650,000 to purchase a new home, Indmar borrowed the entire amount from
FTB at 7.5% (the prime lending rate was 8.75%). Indmar secured the loan with inventory, accounts
and general intangibles, equipment, and the personal guarantee of the Rowes. Richard Moody, the
FTB lending officer who worked with Indmar on the loan, testified that he knew Indmar used the
proceeds to repay Richard. Indmar had loans outstanding with FTB at the time.
As stipulated by the parties, the prime lending rate ranged from a low of 6% to a high of
10.5% between 1987-1998. In 1997, Indmar and FTB executed a promissory note for $1m that was
modified in 1998. The interest rate on the note (7.85%) was below the prime lending rate. Indmar
also had a collateralized line of credit with FTB. Similar to the stockholder advances, the bank line
of credit was used for short-term working capital. FTB charged the following rates for the secured
line of credit:
1995 – 9%
1996 – 8.75%
1997 – 9%
1998 – 8%
1999 – 8.75%
2000 – 9.5%
(rates as of December 31st of each year).
B. Claimed Deductions at Issue
On its tax returns for 1998-2000, Indmar claimed deductions for the purported interest
payments paid on the stockholder advances. The Commissioner issued a notice of deficiency.
Indmar filed a petition in the Tax Court challenging the Commissioner’s decision. After trial, the
Tax Court concluded that the advances did not constitute genuine indebtedness and thus the
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 4

payments to the stockholders were not deductible. The Tax Court calculated a total tax deficiency
of $123,735 and assessed $24,747 in penalties. Indmar timely appealed.
II. LEGAL ANALYSIS
A. Determining Whether Advance Is Debt or Equity
As a general matter, the Commissioner’s determination of a deficiency is entitled to a
presumption of correctness. It is the taxpayer’s burden to prove the determination to be incorrect
or arbitrary. Ekman v. Comm’r, 184 F.3d 522, 524 (6th Cir. 1999).
The basic question before us is whether the advances made to the company by the
stockholders were loans or equity contributions. Under 26 U.S.C. § 163(a), a taxpayer may take a
tax deduction for “all interest paid or accrued . . . on indebtedness.” There is no similar deduction
for dividends paid on equity investments. Thus, if the advances were loans, the 10% payments made
by Indmar to the Rowes were “interest” payments, and Indmar could deduct these payments. If, on
the other hand, the advances were equity contributions, the 10% payments were constructive
dividends, and thus were not deductible.
Over the years, courts have grappled with this seemingly simple question in a wide array of
legal and factual contexts. The distinction between debt and equity arises in other areas of federal
tax law, see, e.g., Roth Steel Tube Co. v. Comm’r, 800 F.2d 625, 629-30 (6th Cir. 1986) (addressing
the issue in the context of the deductibility of advances as bad debt under 26 U.S.C. § 166(a)(1)),
as well as bankruptcy law, see, e.g., In re AutoStyle Plastics, Inc., 269 F.3d 726, 750 (6th Cir. 2001).
The Second Circuit set out the “classic” definition of debt in Gilbert v. Commissioner: “an
unqualified obligation to pay a sum certain at a reasonably close fixed maturity date along with a
fixed percentage in interest payable regardless of the debtor’s income or lack thereof.” 248 F.2d 399,
402 (2d Cir. 1957). “While some variation from this formula is not fatal to the taxpayer’s effort to
have the advance treated as a debt for tax purposes, . . . too great a variation will of course preclude
such treatment.” Id. at 402-03. The question becomes, then, what is “too great a variation”?
To determine whether an advance to a company is debt or equity, courts consider “whether
the objective facts establish an intention to create an unconditional obligation to repay the
advances.” Roth Steel, 800 F.2d at 630 (citing Raymond v. United States, 511 F.2d 185, 190 (6th Cir.
1975)). In doing so, courts look not only to the form of the transaction, but, more importantly, to
its economic substance. See, e.g., Fin Hay Realty Co. v. United States, 398 F.2d 694, 697 (3d Cir.
1968) (“The various factors . . . are only aids in answering the ultimate question whether the
investment, analyzed in terms of its economic reality, constitutes risk capital entirely subject to the
fortunes of the corporate venture or represents a strict debtor-creditor relationship.”); Byerlite Corp.
v. Williams, 286 F.2d 285, 291 (6th Cir. 1960) (“In all cases, the prevailing consideration is that
artifice must not be exalted over reality, whether to the advantage of the taxpayer, or to the
government.”).
The circuit courts have not settled on a single approach to the debt/equity question. We
elucidated our approach in Roth Steel, setting out eleven non-exclusive factors for courts to consider:
(1) the names given to the instruments, if any, evidencing the indebtedness; (2) the
presence or absence of a fixed maturity date and schedule of payments; (3) the
presence or absence of a fixed rate of interest and interest payments; (4) the source
of repayments; (5) the adequacy or inadequacy of capitalization; (6) the identity of
interest between the creditor and the stockholder; (7) the security, if any, for the
advances; (8) the corporation’s ability to obtain financing from outside lending
institutions; (9) the extent to which the advances were subordinated to the claims of
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 5

outside creditors; (10) the extent to which the advances were used to acquire capital
assets; and (11) the presence or absence of a sinking fund to provide repayments.
800 F.2d at 630. No single factor is controlling; the weight to be given a factor (if any) necessarily
depends on the particular circumstances of each case. Id.; see also Universal Castings Corp., 37 T.C.
107, 114 (1961) (“It is not enough when examining such a precedential checklist to test each item
for its presence or absence, but it is necessary also to weigh each item.”), aff’d, 303 F.2d 620 (7th
Cir. 1962). In essence, the more a stockholder advance resembles an arm’s-length transaction, the
more likely it is to be treated as debt. AutoStyle Plastics, 269 F.3d at 750.
B. Standard of Review
We review the Tax Court’s factual findings for “clear error” and its application of law de
novo. Vision Info. Servs., LLC v. Comm’r, 419 F.3d 554, 558 (6th Cir. 2005); Holmes v. Comm’r,
184 F.3d 536, 543 (6th Cir. 1999). The circuits are split on whether the debt/equity question is one
of fact or law, or a mixed question of fact and law. Jaques v. Comm’r, 935 F.2d 104, 106-07 (6th
Cir. 1991) (collecting cases); Roth Steel, 800 F.2d at 629 (collecting cases). Earlier panels of this
court have held that the question is one of fact. Jaques, 1935 F.2d at 107; Roth Steel, 800 F.2d at 629;
Smith v. Comm’r, 370 F.2d 178, 180 (6th Cir. 1966). Accordingly, we review the Tax Court’s
findings for clear error.
Under the clear error standard, we give deference to the Tax Court’s factual findings and
inferences drawn from those findings. Holmes, 184 F.3d at 543 (citations omitted). “Where there
are two permissible views of the evidence, the factfinder’s choice between them cannot be clearly
erroneous.” Anderson v. City of Bessemer City, 470 U.S. 564, 574 (1985). Moreover, we afford even
greater discretion to any credibility determinations made by the Tax Court. Id. at 575.
Yet, while our review is deferential, it is not nugatory. As we explained in Holmes, “an
appellate court may reverse a lower forum’s factual finding for clear error when, even though the
record contains some evidence in support of the finding, consideration of the overall evidence leaves
the reviewing court ‘with the definite and firm conviction that a mistake has been committed.’” 184
F.3d at 543 (quoting Concrete Pipe & Prods. of Cal., Inc. v. Constr. Laborers Pension Trust, 508
U.S. 602, 622 (1993); Anderson, 470 U.S. at 573). If the Tax Court’s factual findings “were induced
by an erroneous view not supported by substantial evidence or made without properly taking into
account substantial evidence to the contrary,” clear error exists. People Helpers Found., Inc. v. City

1
This position was not, however, uniformly embraced by all judges of this circuit. For example, in Livernois
Trust v. Commissioner, the lower court found that the stockholder advances were equity contributions. On appeal, the
decision was affirmed under the clearly erroneous standard. 433 F.2d 879, 883 (6th Cir. 1970). In his concurring
opinion, Judge McCree agreed that the lower court decision should be affirmed, but disagreed with the majority’s
deferential review:
My only difficulty with the opinion of the majority is its holding that we are bound by the “clearly
erroneous” standard of review of Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 80
S. Ct. 1190, 4 L. Ed.2d 1218 (1960). I believe that this is a case like Austin Village, Inc. v. United
States, 432 F.2d 741 (6th Cir. 1970), rev’g 296 F. Supp. 382 (N.D. Ohio 1968), and Union Planters
National Bank v. United States, 426 F.2d 115, 117 (6th Cir. 1970), where the objective indicia of the
transaction are determinative of its legal consequences. . . . Thus the court in both Berthold [v.
Commissioner, 404 F.2d 119, 122 (6th Cir. 1968)] and this case is examining the objective
manifestations of the transactions in question. The existence vel non of such indicia is of course a
question of fact. But the determination of the legal effect of the existence of these indicia is, in my
view, a question of law, and we should not limit our review of a District Court’s determination of such
questions by the Duberstein standard.
Id. at 883 (McCree, J., concurring).
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 6

of Richmond, 12 F.3d 1321, 1329 (4th Cir. 1993). Moreover, as explained by one of our sister courts
which also applies the “clear error” standard to the debt/equity question,
[The lower court] must apply relevant legal principles, and a factual determination
made in disregard of the applicable principles of law, or made through gross
overemphasis on one relevant principle to the exclusion of others, will be reversed
because of the application of an improper legal standard. . . . The characterization of
the ultimate issue as one of fact, and the resulting diminution of the scope of review,
does not, of course, affect the requirement that the legally relevant factors be applied
in making the determination.
Piedmont Minerals Co. v. United States, 429 F.2d 560, 562 n.4 (4th Cir. 1970); see also Flying J,
Inc. v. Comdata Network, Inc., 405 F.3d 821, 829 (10th Cir. 2005) (“Whether the [lower] court
failed to consider or accord proper weight or significance to relevant evidence are questions of law
we review de novo.”) (quoting Harvey ex rel. Blankenbaker v. United Transp. Union, 878 F.2d
1235, 1244 (10th Cir. 1989) (citing Pullman-Stan’d v. Swint, 456 U.S. 273, 291-92 (1982))).
With these principles in mind, we now turn to the Tax Court’s decision in this case.
C. Roth Steel Factors
After discussing some, but not all, of the Roth Steel factors, the Tax Court concluded that
the Rowes’ advances were equity contributions. Specifically, it found the following factors weighed
in favor of equity: (i) Indmar did not pay any formal dividends (although this is not one of the Roth
Steel factors); (ii) there was no fixed maturity date or obligation to repay; (iii) repayment came from
corporate profits and would not be paid if there were not sufficient profits; (iv) advances were
unsecured; (v) there was no sinking fund; and (vi) at the time advances were made, there was no
unconditional and legal obligation to repay. The court found that several factors weighed in favor
of debt: (i) Indmar reported the advances on its federal income tax returns as interest expenses;
(ii) external financing was available; (iii) Indmar was adequately capitalized; (iv) the advances were
not subordinated to all creditors; and (v) the Rowes did not make the advances in proportion to their
respective equity holdings. The court concluded that the factors favoring equity “certainly
outweigh” those favoring debt. Indmar, 2005 T.C.M. LEXIS 31, at *15.
As explained below, we find that the Tax Court clearly erred in concluding that the advances
were equity contributions rather than bona fide debt. The Tax Court failed to consider several Roth
Steel factors. It also did not address in its analysis certain uncontroverted testimony and evidence
upon which the parties stipulated. Consideration of all of the record evidence in this case leaves us
“with the definite and firm conviction that a mistake has been committed.” Holmes, 184 F.3d at 543.
1. Fixed Rate of Interest and Interest Payments
The first factor to which we look is whether or not a fixed rate of interest and fixed interest
payments accompanied the advances. Roth Steel, 800 F.2d at 631. The absence of a fixed interest
rate and regular payments indicates equity; conversely, the presence of both evidences debt. Id.; 7
Mertens Law of Fed. Income Tax’n § 26:28 (“A fixed interest rate is indicative of a deductible
interest payment.”) (collecting cases). In its findings of fact, the Tax Court determined that the
advances were made with a 10% annual return rate. The court also found that Indmar made regular
monthly interest payments on all of the advances.
The fixed rate of interest and regular interest payments indicate that the advances were bona
fide debt. In its analysis, however, the Tax Court took a different view. Rather than analyzing these
facts within the Roth Steel framework (i.e., as objective indicia of debt or equity), the Tax Court
focused instead on why the Rowes made the advancements: it concluded that the Rowes
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 7

“characterized the cash transfers as debt because they wanted to receive a 10-percent return on their
investment and minimize estate taxes.” Indmar, 2005 T.C.M. LEXIS 31, at *11. Yet, neither of
these intentions is inconsistent with characterizing the advances as loans.
For tax purposes, it is generally more important to focus on “what was done,” than “why it
was done.” United States v. Hertwig, 398 F.2d 452, 455 (5th Cir. 1968). “In applying the law to the
facts of this case, . . . it is ‘clear that the objective factors . . . are decisive in cases of this type.’”
Raymond, 511 F.2d at 191 (quoting Austin Village, 432 F.2d at 745). It is largely unremarkable that
the Rowes wanted to receive a return from their advances. Most, if not all, creditors (as well as
equity investors) intend to profit from their investments. Bordo Prods. Co. v. United States, 476 F.2d
1312, 1322 (Ct. Cl. 1973). As long as the interest rate is in line with the risks involved, a healthy
return on investment can evidence debt.
Of course, “[e]xcessively high rates would . . . raise the possibility that a distribution of
corporate profits was being disguised as debt. Were such the purpose of an exorbitant interest rate,
the instrument involved would probably not qualify as debt in form.” Scriptomatic, Inc. v. United
States, 555 F.2d 364, 370 n.7 (3d Cir. 1977) (citing William T. Plumb, Jr., The Fed. Income Tax
Significance of Corporate Debt: A Critical Analysis & A Proposal, 26 Tax L. Rev. 369, 439-40
(1971)). The Tax Court found that the 10% rate exceeded the federal prime interest rate during most
of the period at issue, as well as the rate charged by FTB on several of its loans to Indmar.
The record indicates that the 10% rate was not an “exorbitant interest rate” under the
circumstances. Indmar had a collateralized line of credit with FTB, which, similar to the stockholder
advances, was available for short-term working capital. The rate charged by FTB for the line of
credit ranged between 8%-9.5%, a rate not much below the fixed rate of 10% charged by the Rowes.
The rate differential makes financial sense when considering the2 differences in security – the FTB
line of credit was secured while the Rowes’ advances were not.
As for the Rowes’ desire to minimize their estate taxes, this also offers little to the analysis.
“Tax avoidance is entirely legal and legitimate. Any taxpayer ‘may so arrange his affairs that his
taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the
Treasury; there is not even a patriotic duty to increase one’s taxes.’” Estate of Kluener v. Comm’r,
154 F.3d 630, 634 (6th Cir. 1998) (quoting Helvering v. Gregory, 69 F.2d 809, 810 (2d Cir. 1934)
(L. Hand, J.)). The desire to avoid or minimize taxes is not itself directly relevant to the question
whether a purported loan is instead an equity investment. Rather, such a desire is only tangentially
relevant, by acting as a flag to the Commissioner and courts to look closely at the transaction for any
objective indicia of debt.
Far from proving the Commissioner’s position, the existence and consistent payment of a
fixed, reasonable interest rate strongly supports the inference that the advances were bona fide loans.
2. Written Instruments of the Indebtedness
“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 *15 (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 *11. The Tax Court erred by focusing4 on the initial lack of documentation without
addressing the subsequent history of executed notes.
3. Fixed Maturity Date and Schedule of Payments
“The absence of a fixed maturity date and a fixed obligation to repay indicates that the
advances were capital contributions and not loans.” Roth Steel, 800 F.2d at 631. Based on the
Rowes’ waivers, the Tax Court concluded that there was no fixed maturity date or fixed obligation
to repay. While correct, we find that this factor carries little weight in the final analysis. The parties
structured the advances as demand loans, which had ascertainable (although not fixed) maturity
dates, controlled by the Rowes. Piedmont Minerals, 429 F.2d at 563 n.5 (“The absence of a fixed
maturity date is a relevant consideration, but it is far from controlling. The maturity of a demand
note is always determinable by its holder.”). Furthermore, the temporary waiver of payment does
not convert debt into equity “since [the stockholders] still expected to be repaid.” AutoStyle Plastics,
269 F.3d at 751.
Where advances are documented by demand notes with a fixed rate of interest and regular
interest payments, the lack of a maturity date and schedule of payments does not strongly favor
equity. To give any significant weight to this factor would create a virtual per se rule against the
use of demand notes by stockholders, even though “[m]uch commercial debt is evidenced by
demand notes.” Piedmont Minerals, 429 F.2d at 563 n.5; see also AutoStyle Plastics, 269 F.3d at 750
(cautioning against a “rigid” rule that the factor always indicates equity).
4. The Source of Repayments
“An expectation of repayment solely from corporate earnings is not indicative of bona fide
debt regardless of its reasonableness.” Roth Steel, 800 F.2d at 631 (emphasis added). Repayment
can generally come from “only four possible sources . . .: (1) liquidation of assets, (2) profits from
the business, (3) cash flow, and (4) refinancing with another lender.” Bordo Prods., 476 F.2d at 1326
(quoting Plumb, supra, at 526).
The Tax Court found that the “source of repayments” factor favored equity. It relied upon
Richard Rowe’s testimony that Indmar was expected to make a profit and that repayment “has to
come from corporate profits or else the company couldn’t pay for it.” Indmar, 2005 T.C.M. LEXIS
31, at *14. The full colloquy from the testimony, however, is more equivocal:

3
The Tax Court did count in favor of debt the fact that Indmar consistently reported the payments as interest
expense on its federal taxes.
4
The Tax Court was troubled by the treatment of the advances in the company’s records as both demand debt
and long-term debt. While we share the Tax Court’s concerns, this was not the issue before the Tax Court or us on
appeal. Importantly, regardless of whether it classified the payments as demand debt or long-term debt, the company
at all times identified the advances as some form of debt. We leave it to the Tennessee authorities to determine whether
Indmar owes any state taxes or penalties as a result of its reporting and accounting practices.
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 9

Q. . . . [A]t the time that you made these advances, were you anticipating that the
repayment was going to come from corporate profits?
A. Yes, sir. It has to come from corporate profits or else the company couldn’t
pay for it. Unless it made profit – and I have always believed from the first day we
started, that we were going to be profitable.
Q. Was it your understanding and intent, at the time you made these advances,
that if the company was not, in fact, profitable, you would not be repaid?
A. I had no intentions of not being repaid, sir.
Q. Why is that?
A. I believe it’s me. It’s my personality.
Q. Is that because you intended to make a profit?
A. Yes, sir.
There are at least two plausible ways to read this testimony. One can read it the way the Tax
Court apparently did – Rowe’s testimony was, at best, contradictory: repayment must come from
profits, but he had no intention of not being repaid, regardless of the company’s fortunes. Given the
apparent contradiction, one should focus on the statement against Indmar’s interest: Rowe admitted
that repayment of the advances “has to come from corporate profits or else the company couldn’t
pay for it.” If repayment “has” to come from profits, then this would imply that repayment was tied
to the company’s fortunes, suggesting the advances were equity contributions.
Another way to read the testimony, however, is that Rowe, as a small businessman and
unsecured creditor, believed that full repayment of all of Indmar’s debt required a thriving,
successful business, which, ultimately, required profits. In other words, struggling companies near
or at bankruptcy do not repay their debts, at least not dollar for dollar. Under this reading, his
testimony is consistent with debt. In fact, we sounded a similar note in an earlier decision
addressing the debt/equity issue: “One who makes a loan to a corporation also takes a risk, and while
he may receive evidence of an obligation, payable in any event, often such obligation is never paid.
. . . ‘All unsecured loans involve more or less risk.’” Byerlite, 286 F.2d at 292 (quoting Earle v. W.J.
Jones & Son, Inc., 200 F.2d 846, 851 (9th Cir. 1952)).
If there was no other evidence to support one view or the other, we could not say that the Tax
Court’s reading was clearly erroneous. Credibility determinations are left to the fact finder, and our
review on appeal is strictly limited. The “Tax Court ‘is not bound to accept testimony at face value
even when it is uncontroverted if it is improbable, unreasonable or questionable.’” Lovell & Hart,
Inc. v. Comm’r, 456 F.2d 145, 148 (6th Cir. 1972) (quoting Comm’r v. Smith, 285 F.2d 91, 96 (5th
Cir. 1960)). On the other hand, the Tax Court cannot ignore relevant evidence in making its factual
findings and any inferences from those findings.
Here, there is undisputed testimony by Rowe and the FTB lending officer, corroborated by
stipulated evidence in the record, that clearly weighs in favor of debt on this factor. Indmar repaid
a significant portion of the unpaid advances – $650,000 – not from profits but by taking on
additional debt from FTB. While the interest rate on the FTB loan was lower than 10%, Indmar had
to secure the bank loan with inventory, accounts and general intangibles, equipment, and personal
guarantees. Thus, Indmar repaid a significant portion of the unsecured stockholder advancements
by taking on secured debt from a bank, rather than by taking the funds directly from earnings. This
is important evidence that the parties had no expectation that Indmar would repay the advances
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 10

“solely” from earnings. The Tax Court did not discuss or even cite this evidence in its Roth Steel
analysis.
5. The Extent to Which the Advances Were Used to Acquire Capital
Assets
Nor did the Tax Court address whether Indmar used the advances for working capital or
capital expenditures. “Use of advances to meet the daily operating needs of the corporation, rather
than to purchase capital assets, is indicative of bona fide indebtedness.” Roth Steel, 800 F.2d at 632.
Richard Rowe testified that Indmar always went to a bank for funds to buy capital equipment. He
also testified that all of the advances he made to Indmar were used for working capital, as opposed
to capital equipment. This is uncontroverted testimony. The government points, however, to
Rowe’s testimony that he advanced funds even when Indmar did not “need” the funds, and argues
that this somehow cuts against his testimony that the advances were used as working capital.
The government’s argument is unpersuasive. We do not find that Rowe’s testimony on this
subject was “improbable, unreasonable or questionable,” especially in the absence of the Tax Court
addressing this factor in its analysis.5 A review of Indmar’s financial statements shows that it used
all of the funds it received in various ways, including working capital and capital equipment
expenditures. Thus, Indmar used the advances it received from the Rowes, even if not immediately
upon receipt – i.e., Indmar identified a “need” for the advances at some point. There is nothing
specific in the record, including Indmar’s financial statements, that suggests the advances went to
purchase capital equipment as opposed to being used for working capital. Accordingly, the
government’s supposition does not counter Rowe’s testimony, and this factor squarely supports a
finding of debt.
6. Sinking Fund
“The failure to establish a sinking fund for repayment is evidence that the advances were
capital contributions rather than loans.” Id. The Tax Court was correct to point out that the lack of
a sinking fund favors equity. This factor does not, however, deserve significant weight under the
circumstances. First, a sinking fund (as a type of reserve) is a form of security for debt, and the Tax
Court also counted the general absence of security for the stockholder advances as favoring equity.
Second, the presence or absence of a sinking fund is an important consideration when looking at
advances made to highly leveraged firms. In that case, the risk of repayment will likely be high on
any unsecured loans, so any commercially reasonable lender would require a sinking fund or some
other form of security for repayment. Where a company has sound capitalization with outside
creditors ready to loan it money (as here), there is less need for a sinking fund. See Bordo Prods.,
476 F.2d at 1326.
7. The Remaining Roth Steel Factors
On the remaining Roth Steel factors, the Tax Court determined that one favored equity (lack
of security for the advances) and four favored debt (the company had sufficient external financing
available to it; the company was adequately capitalized; the advances were not subordinated to all
creditors; and the Rowes did not make the advances in proportion to their respective equity
holdings). These findings are well-supported in the record.

5
As the Tax Court did not address this factor, it made no credibility determinations with respect to Richard
Rowe’s testimony relating to the use of the advancements. At one point in its decision the Tax Court did find that
Rowe’s testimony was “contradictory, inconsistent, and unconvincing” and that the parties “manipulated facts,” but this
was in specific reference to its discussion about the inconsistent treatment of the advances as demand debt and long-term
debt. See Indmar, 2005 T.C.M. LEXIS 31, at *12-13; see also supra note 4.
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 11

8. Failure to Pay Dividends
The Tax Court included in its discussion of Roth Steel a factor not actually cited in that case
– Indmar’s failure to pay dividends. In support, the Tax Court cited our decision in Jaques v.
Commissioner.
The relevance of Jaques to this case is questionable. That case involved the withdrawal of
funds by a controlling stockholder from his closely-held corporation. The stockholder argued that
the withdrawal itself was a loan. We rejected the argument, relying in part on the fact that the
corporation had never issued a formal dividend, and thus the withdrawal could have been a disguised
dividend. Jaques, 935 F.2d at 107-08. The situation here is the exact opposite – the stockholders
were advancing money to the corporation (not from), and it is the nature of those advances that we
must determine.
Had the Rowes charged Indmar an exorbitant interest rate, the lack of any formal dividends
might have been relevant to showing that the payments were not interest payments, but disguised
dividends. As this was not the case, see supra Section II.C.1, we do not address further the
relevance, if any, of the lack of dividend payments to the debt/equity question presented here.
D. The Tax Court Committed Clear Error
To summarize, eight of the eleven Roth Steel factors favor debt. The three remaining factors
suggest the advances were equity, but, as we explained above, two of the factors – the absence of
a fixed maturity date and schedule of payments and the absence of a sinking fund – deserve little
weight under the facts of this case. Moreover, the non-Roth Steel factor relied upon by the Tax
Court – Indmar’s failure to pay dividends – has questionable relevance to our inquiry. The only
factor weighing in favor of equity with any real6 significance – the lack of security – does not
outweigh all of the other factors in favor of debt.
Accordingly, the trial evidence, when reviewed as a whole, conclusively shows that the
Rowes’ advances to Indmar were bona fide loans. The Tax Court committed clear error in finding
otherwise.
III. CONCLUSION
For the foregoing reasons, we reverse the Tax Court’s determination that the stockholders’
advances were equity contributions. We find that the advances exhibited clear, objective indicia of
bona fide debt. Accordingly, we also reverse the Tax Court’s assessment of accuracy-related
penalties.

6
Judge Moore in her dissent suggests that we give “minimal deference” to the conclusions of the Tax Court.
We respectfully disagree. Much of our analysis is expressly predicated on the Tax Court’s findings of fact. See, e.g.,
supra §§ II.C.1 & 2 (relying on the Tax Court’s findings of a fixed 10% interest rate and regular interest payments, and
documentation of advances from 1993-2000); 3 & 6 (accepting the Tax Court’s findings of no fixed maturity date or
schedule of payments, and no sinking fund, but concluding that these factors do not deserve significant weight under
the circumstances); and 7 (accepting in full the Tax Court’s findings on five of the Roth Steel factors). On the remaining
two Roth Steel factors, we point to clear, uncontroverted evidence in the record favoring debt, evidence that the Tax
Court unfortunately did not discuss in its Roth Steel analysis. On the issue of witness credibility, it is apparent from
our analysis that we take issue not with any credibility determinations the Tax Court may have made as to Rowe’s
testimony on certain topics, but with the its failure to address evidence.
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 12

______________________
CONCURRENCE
______________________
ROGERS, Circuit Judge, concurring. I concur fully in the majority opinion. I write
separately to explain why the legal, non-factual components of the tax court’s analysis are properly
examined on appeal without deference to the tax court, notwithstanding the overall “clearly
erroneous” standard that our court has stated to be applicable to the determination of whether a
particular transaction is debt or equity.
Whether an issue to be determined by the courts is one of fact or law is sometimes pretty
simple. But often, especially when the issue can be stated in the form of “Does the item before us
fit within the legal definition of x?”, the factual-versus-legal nature of the issue can be perplexing.
This is because the seemingly single question really has two different components: “What is the
nature of this item?” and “What is the legal meaning of x?” In a case where there is total agreement
between the parties as to the nature of the item, the question whether the item is an x is a legal one.
In a case where there is total agreement between the parties as to the meaning of x, but a dispute as
to the nature of the item, the issue of whether the item is an x is totally factual. Where there is some
dispute on each of the two issues, the issue of whether the item is an x is a mixed question of law
and fact.
For instance, assume an ordinance taxes the keeping of pet dogs. Jo is assessed a tax for
keeping Fido, and Jo appeals. The question “Is Fido a dog?” may be factual or it may be legal. If
Jo claims only that Fido is a really a cat, then the issue is factual. No one argues that the legal
definition of dog includes cats; the only dispute is regarding the actual nature of Fido. On the other
hand, if both parties agree that Fido is a prairie dog, the question “Is Fido a dog?” is a purely legal
one. There is no dispute about the nature of Fido; the only dispute involves what the legal meaning
of “dog” is. Of course if the city says Fido is a schnauzer while Jo says that Fido is actually a prairie
dog, the question “Is Fido a dog” is mixed if both legal and factual aspects of the seemingly single
question are in dispute.
We must be careful of the following type of error in the application of the doctrine of stare
decisis to scopes of review for fact or law. Assume that in one case the issue is whether Rover is
a dog or a cat. The appellate court in its opinion states that “under the ordinance the issue of
whether an animal is a dog is subject to clearly erroneous review.” This is true for the reason,
perhaps unstated, that there is no dispute as to the meaning of “dog” in the particular case. Now in
a second case the issue is whether a prairie dog Daisy is a “dog” under the ordinance. The appellate
panel, feeling bound by the statement in case one that “whether an animal is a dog is subject to
clearly erroneous review,” applies clearly erroneous review, i.e., deference to the trial court, on the
purely legal issue of whether a prairie dog is taxable under the ordinance. It should be obvious that
such analysis is fallacious.
One way to express the fallacy is to say that the first case is distinguishable: the first holding
applies only to the extent that the issue in the first case was actually a fact issue. Neither the
reasoning nor the underlying facts of the first case lead to the conclusion that clearly erroneous
review should apply in the second case.
The danger of applying clearly erroneous review in this scenario is not purely formal. If
deference is given to trial court determinations of law by a misapplication of stare decisis, this may
lead quickly to the very types of inconsistencies that stare decisis doctrine seeks to avoid. If one
trial court thinks prairie dogs are taxable and another does not, and both decisions are given
deference under a clearly erroneous standard, inconsistent law may be applied to similarly situated
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 13

persons, even after appeal to a single appellate court. This contravenes the most fundamental of
legal precepts: the law should apply the same to everybody.
Similarly, if in a mixed fact-law case the first appellate panel had said the issue was subject
to clearly erroneous review, this statement has to be interpreted to mean that where fact issues
predominate, and a single scope of review rubric is useful, that rubric will be “clearly erroneous.”
But subissues of law will be reviewed independently. In other words, a holding in a mixed-question
case that the scope of review is “clearly erroneous” is best interpreted to mean that where factual
issues predominate, the predominant scope of review is “clearly erroneous.” But to the extent that
application of that overall scope of review requires some legal determinations, those legal
determinations will be made de novo. Otherwise the appellate court will be in the despicable
position of permitting the law to apply differently to indistinguishable facts.
Accordingly, I interpret the previous statements by this court that debt-vs.-equity
determinations are subject to clearly erroneous review as holding that, where factual issues
predominate, the overall scope of review can be characterized as “clearly erroneous,” and that within
such a generally applicable “clearly erroneous” scope of review, subissues of a clearly legal nature
are reviewed de novo. To do otherwise would be to interpret our precedents as compelling us to
decide differently on indistinguishable facts, merely because the lower courts read the law
differently. Stated differently, I am fully persuaded that the words of Judge McCree in Livernois
Trust v. Commissioner, 433 F.2d 879, 883 (6th Cir. 1970), and quoted in the majority opinion in
footnote 1, not only reflect wisdom and insight, but also represent good law.
The various holdings that the debt-vs.-equity issue is subject to clearly erroneous review can
be traced back to the Supreme Court’s holding in Commissioner v. Duberstein, 363 U.S. 278, 291
(1960), a case involving whether each of two specific transfers — one between business associates
and one by a church to a former employee — was a “gift” and therefore not subject to income tax.
Id. at 280. The Supreme Court held that the issue was “basically one of fact” and therefore subject
to “clearly erroneous” review when a lower court had made the determination without a jury. Id.
at 290-91. The clearly erroneous rule applied as well “to factual inferences from undisputed basic
facts, as will on many occasions be presented in this area.” Id. at 291 (citation omitted). In
Duberstein, however, the ultimate issue was whether or not the transfer was intended as “a
recompense for past services, or an inducement for [taxpayer] to be of further service in the future.”
Id. at 292. In other words, there was little disagreement as to the legal standard (gift only if no
intended recompense or inducement), but there was disagreement as to the ultimate fact of whether
there was such intent. Considered this way, the issue was predominantly if not entirely one of fact.
Transactions that look alike could have different tax consequences based on the underlying intent
of the transferor. Almost always the issue will be predominantly factual. Thus, the Supreme Court
logically deemed the gift-vs.-income issue in that case to be essentially factual. Cases following in
the wake of Duberstein should not be interpreted, however, to require deference to lower court legal
determinations, either where legal issues predominate, or where dispositive subissues are legal.
Moreover, a careful reading of our precedents does not compel deference to the legal aspects
of the question whether an advance to a corporation is a loan or investment. In Smith v.
Comissioner, we used the “clearly erroneous” rubric only in conjunction with the “sufficiency of
evidence.” 370 F.2d 178, 180 (6th Cir. 1966) (“Sufficient evidence existing in the record to form
a basis for this determination, which is here found not to be clearly erroneous, it will not be
disturbed by this court.”).
In Roth Steel v. Comissioner, we characterized the overall issue of whether Roth Steel’s
unrepaid advances to a subsidiary corporation were loans, deductible as bad debts, or capital
contributions, as one of fact subject to the clearly erroneous test. See 800 F.2d 625, 626, 629 (6th
Cir. 1986). Our conclusion was that the tax court did not err when determining that the
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 14

contributions were capital because no interest was ever paid on the advances, the advances were not
evidenced by notes, the debtor was undercapitalized, the source of repayment was contingent on the
financial success of the debtor, and there was no fixed rate of interest. Id. at 630-32. In so
concluding, we evaluated each of the relevant eleven factors independently, accepting the lower
court’s factual determination but applying relevant case law (apparently independently) to evaluate
the weight of each factor. See id. at 629-32. Even if the statement in our opinion that the clearly
erroneous scope of review applied could be read to say that deference was required with respect to
our legal analysis of the weight of each factor, and to our legal balancing of all the factors, such a
statement must be interpreted in light of how we applied that scope of review. What we actually did
was use caselaw to weigh each of the relevant factors.
Our application of the clearly erroneous standard in Jacques v. Commissioner, moreover, is
entirely distinguishable. That case did not involve whether an advance to a business was a loan or
an equity investment, but rather whether a payment by the business was a dividend (i.e., not to be
repaid) or a loan (to be repaid). See 935 F.2d 104, 107 (6th Cir. 1991). We reviewed the issue for
clear error, relying on several previous cases holding that the issue was ultimately one of whether
repayment was intended. See Dietrick v. Comm’r, 881 F.2d 336, 340 (6th Cir. 1989) (“The intention
of the parties is the controlling factor in determining whether or not advances [from the business to
the investor] should be termed as loans”) (citation omitted); Estate of DeNiro v. Comm’r, 746 F.2d
327, 330-31 (6th Cir. 1984) (determination of whether corporate payment was a loan or a dividend
depended on corporation’s intent whether it expected to be repaid); Wilkof v. Comm’r, 636 F.2d
1139, 1140 (6th Cir. 1981) (per curiam) (issue was whether corporate payment was a dividend or
a loan; Duberstein cited for “clearly erroneous” scope of review); Berthold v. Comm’r, 404 F.2d
119, 122 (6th Cir. 1968) (“Established authority holds that the intention of the parties is the
controlling factor in determining whether or not advances [by corporations to shareholders] should
be termed loans.”). Such an intent issue, like the issue in Duberstein, is largely factual—the court
knows what the standard is but needs to ascertain what is going on in someone’s mind. This
contrasts with the issue in the present case, which is only in small part determined by the intent of
the transacting parties. It is undisputed that repayment was intended in this case; the issue is the
legal nature of the transaction that manifested the intent.
Thus, in cases like the present one where the objective characteristics of a transaction have
significant importance, our treatment of those objective characteristics does not require deference
to the lower court. As we said in Holmes v. Commissioner, 184 F.3d 536, 543 (6th Cir. 1999)
(emphasis added):
On review, the Tax Court’s factual findings, and inferences drawn from the facts,
especially witness credibility determinations, are entitled to deference by the
appellate court. . . . By contrast, the Tax Court’s application of legal standards, and
its legal conclusions, are reviewed de novo.
In my view, these cases are perfectly consistent with not deferring to the legal aspects of the
lower court’s reasoning, and avoidance of the fallacy described above requires us not to defer to
such legal determinations. See Livernois Trust, 433 F.2d at 883 (McCree, J., concurring). Thus,
while the majority opinion in this case cannot be faulted for stating that the overall scope of review
in this case is “clear error,” that conclusion must be interpreted to incorporate de novo review of
legal questions necessary to our determination. Viewed in this way, the majority opinion’s analysis
is compelling.
In the instant case there is, to be sure, a limited factual aspect. One of the relevant Roth
factors (the fourth) is whether repayment was intended to depend on company profit. 800 F.2d at
630. The tax court found that Indmar always intended to repay Mr. Rowe solely from profits
because Mr. Rowe so testified. Clearly erroneous review requires substantial deference to this
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 15

conclusion, but even applying such deference it is necessary to reject the factual conclusion: the
undisputed facts show that it is not what happened. Indmar repaid advances on two occasions by
tapping its line of credit (i.e., when there was not sufficient profits to cover the demand amount).
More importantly, however, the facts relevant to all the remaining factors are simply not in
dispute. Even assuming that the payments were intended to be paid solely from profits, these other
factors as a matter of law require the legal conclusion that the transactions represent debt rather than
equity. There is no dispute as to the content of the transactions, form of the obligation, perfect
repayment history, Indmar’s solid creditworthiness, Indmar’s equity-heavy capitalization, respective
ownership interest of the parties, subordination of the notes, and applicable market interest rates.
These undisputed facts make the tax court’s legal conclusion that Indmar’s obligation was equity
erroneous. In other words, the extensive legal aspects of the question of whether these transactions
amounted to debt are subject to our independent review, notwithstanding the applicability of a
general “clearly erroneous” rubric to the overall question. Or stated differently, because the issue
in dispute in this case is predominantly legal, cases requiring “clearly erroneous” review are pro
tanto distinguishable. Either way, in a case like this one where a case that is largely factually
indistinguishable could easily arise before a different lower court in the future, we must—to the
extent that the facts are indeed objectively undisputed—rule in a way that insures consistent results.
Applying “clearly erroneous” deference to lower court legal determinations, no matter how hidden
or embedded such determinations are in overall1determinations that are partly or even largely factual,
is fundamentally at odds with the rule of law.

1
Indeed, commentators have expressed concern that there is no predictable legal distinction between loans to
a business and equity investment, and that the unpredictability of this legal distinction is partially caused by the issue
being “treated as one of fact to be resolved by applying vague standards . . . .” See Stephen A. Lind, Stephen Schwarz,
Daniel J. Lathrope & Joshua D. Rosenberg, Fundamentals of Business Enterprise Taxation 474 (3d ed. 2005). These
authors note, “Exhaustive research leaves one with the firm conviction that the courts are applying an amorphous and
highly unsatisfactory ‘smell test.’” Id.
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 16

_______________
DISSENT
_______________
KAREN NELSON MOORE, Circuit Judge, dissenting. I respectfully dissent because I
believe that the Tax Court’s conclusion that the shareholder advances to taxpayer were equity
contributions rather than genuine debt is not clearly erroneous. Far from being left “with the definite
and firm conviction that a mistake has been committed,” Holmes v. Comm’r, 184 F.3d 536, 543 (6th
Cir. 1999) (internal quotation marks omitted), I believe that the record provides significant support
for the Tax Court’s conclusion, and I would affirm.
The majority is of course correct when it states that in reviewing Tax Court decisions, we
review factual findings for clear error and conduct a more searching de novo inquiry into legal
conclusions of the lower court. See Dow Chemical Co. v. United States, 435 F.3d 594, 599 n.8 (6th
Cir. 2006) (explaining that the employment of different standards of review for factual and legal
conclusions is most consistent with Supreme Court precedent and concluding that the ultimate
question of whether a transaction is an economic sham is a legal conclusion reviewed de novo);
Holmes, 184 F.3d at 543. Similarly, I share the concern expressed by Judge Rogers that we must
take care to avoid being unduly deferential to trial court determinations of law, particularly when
we are considering questions like this “where factual issues predominate, [and thus] the predominant
scope of review is ‘clearly erroneous.’” Concurrence at 14. However, we must not be so concerned
about avoiding being overly deferential that we fail to afford due deference to a lower court’s
determinations when our standard of review so requires. While other courts have concluded that the
ultimate issue of whether a shareholder advance constitutes equity or debt is a question of law or a
mixed question of law and fact that is reviewed de novo, we have repeatedly held that this specific
question is a question of fact reviewed for clear error, and we remain bound by this precedent. See
Jacques v. Comm’r, 935 F.2d 104, 106-07 (6th Cir. 1991); Roth Steel Tube Co. v. Comm’r, 800 F.2d
625, 629 (6th Cir. 1986), cert. denied, 481 U.S. 1014 (1987); Smith v. Comm’r, 370 F.2d 178, 180
(6th Cir. 1966). I am therefore troubled by the robustness of the majority opinion’s clear error
review of several of the factual aspects of this case as well as the ultimate question of whether the
payments were debt or equity, and I believe that the majority has “misapprehended and misapplied
the clearly-erroneous standard.” Anderson v. City of Bessemer City, 470 U.S. 564, 566 (1985).
At the same time that the majority opinion acknowledges that we review for clear error the
factual aspects of this case and the ultimate “debt versus equity” question, the majority’s analysis
fails fully to embody this standard. The clear-error standard does not permit us as a reviewing court
to ignore the relevant credibility determinations made and relied upon by the lower court. A lower
court’s factual conclusions about the credibility of a witness must be treated with even greater
deference, “for only the trial judge can be aware of the variations in demeanor and tone of voice that
bear so heavily on the listener’s understanding of and belief in what is said.” Id. at 575. Richard
Rowe was the primary witness to testify before the Tax Court, and Rowe provided much of the
factual information to the court about the Roth Steel factors. To say that the Tax Court was
unimpressed with Rowe’s testimony is an understatement. The court called Rowe’s testimony
“contradictory, inconsistent, and unconvincing,” and concluded that the taxpayer, “along with the
Rowes, manipulated facts to attempt to make the transfers appear as debt and avoid certain legal
consequences.” Joint Appendix at 348 (Tax Court Op. at 11). Yet the majority appears largely to
ignore the Tax Court’s negative credibility determinations about Mr. Rowe, as it repeatedly
describes Rowe’s testimony as “uncontroverted” and credits his self-serving testimony over the
contrary determinations of the Tax Court. The majority suggests in footnote five that the Tax
Court’s negative credibility determinations were limited to what can only be called the legal
gymnastics of the taxpayer simultaneously to classify the shareholder advances as both demand
loans and long-term debt. This is a strained reading of the Tax Court’s opinion, which I believe
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 17

presents Rowe’s credibility problems in more general terms, as part of the “particular circumstances
of [the] case” that formed the factual backdrop for the Tax Court’s determination that the advances
were equity rather than debt. Roth Steel, 800 F.2d at 630.
The minimal deference that the majority gives to the conclusions of the Tax Court and the
license it takes in positing alternative interpretations of the trial evidence to those of the Tax Court
are also inconsistent with clear-error review. While I certainly agree that our review for clear error
is not nugatory, “this standard plainly does not entitle a reviewing court to reverse the finding of the
trier of fact simply because it is convinced that it would have decided the case differently.”
Anderson, 470 U.S. at 573. Yet this is exactly what the majority does in several instances. When
considering whether the record contained written instruments of indebtedness, the majority explains
that unlike the Tax Court, it was more persuaded by the eventual execution of formal notes than the
initial failure to document the advances. Later the majority states there are “at least two plausible
ways to read” Richard Rowe’s testimony about the source of repayments, and then opts for the
opposite conclusion from that of the Tax Court. Majority Op. at 9. Thus while the majority’s
opinion may take the form of a clear-error review, in substance the majority “improperly conduct[s]
what amount[s] to a de novo weighing of the evidence in the record.” Anderson, 470 U.S. at 576.
Here the shareholder advances to Indmar are subject to “particular scrutiny” because, like
advances between a controlling corporation and its subsidiary, “the control element suggests the
opportunity to contrive a fictional debt.” Roth Steel, 800 F.2d at 630 (internal quotation marks
omitted). The taxpayer bears “the burden of establishing that the advances were loans rather than
capital contributions.” Id. (citing Smith, 370 F.2d at 180). The Tax Court’s conclusion that Indmar
failed to meet this burden was not clearly erroneous. While several of the Roth Steel factors support
Indmar’s claim that the shareholder advances were bona fide debt, several others instead favor
equity. The unsecured nature of the shareholder advances “is a strong indication that the advances
were capital contributions rather than loans.” Id. at 631. Indmar’s failure to establish a sinking fund
is further “evidence that the advances were capital contributions rather than loans.” Id. at 632.
While the majority appears to view the absence of a sinking fund as redundant with the
consideration that the transfers were unsecured, Roth Steel considers both as factors, and here both
factors indicate equity. In addition, Indmar did not have any fixed maturity date or fixed obligation
to repay the Rowes. This “indicates that the advances were capital contributions and not loans.”
Id. at 631. Nor did the Tax Court err in viewing Mr. Rowe’s statement that repayment would have
to come from corporate profits as a strong indicator of equity, because “[a]n expectation of
repayment solely from corporate earnings is not indicative of bona fide debt regardless of its
reasonableness.” Id.
The majority and concurrence make much of the fact that the taxpayer had to turn to its bank
line of credit when Rowe demanded the repayment of $650,000 of his advanced funds on short
notice in 1995 so that he could buy a home in Florida. This was an anomalous occurrence in the
many years of shareholder advances and repayments, the outstanding balances of which ranged from
$600,000 to over $1.7 million over the years, and does not negate Rowe’s statements that he made
the advances with the expectation that he would be repaid from profits or the fact that all other
repayments appear to have come from the taxpayer’s profits. While I agree with my colleagues that
the Tax Court should have acknowledged that in this instance the funds to repay the advances came
from additional debt rather than profits, I agree with the Tax Court that overall the evidence suggests
that repayment was expected to and did come from the taxpayer’s profits, and therefore this factor
favors equity.
In the particular circumstances of this case, which include the “contradictory, inconsistent,
and unconvincing” testimony of the majority shareholder, I cannot conclude that it was clearly
erroneous for the Tax Court to decide that the factors that favored equity were deserving of more
weight than those that favored debt. Because I believe the record supports two permissible views
No. 05-1573 Indmar Prods. Co. v. Comm’r Page 18

of the evidence, I cannot join the majority’s conclusion that the Tax Court’s determination was
clearly erroneous. Anderson, 470 U.S. at 574. I would affirm the decision of the Tax Court.