T.C. Memo. 2000-104
UNITED STATES TAX COURT
LAURO G. AND GAYLE W. GUADERRAMA, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
STEVE H. BENAVIDEZ, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 16255-97, 20939-97. Filed March 28, 2000.
Towner Leeper, for petitioners in docket No. 16255-97.
Ramon Acosta, for petitioner in docket No. 20939-97.
Rosemary Schell, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
GERBER, Judge: In separate notices of deficiency,
respondent took a protective position and determined deficiencies
in petitioners’ Federal income taxes as follows:
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Docket No. Year Deficiency
16255-97 1993 $35,452
1994 17,053
1
20939-97 1992 12,339
1993 1,054
1
This amount is based on a $16,046 adjustment to income
under the indirect method (the source and application of funds
method). In the stipulation of facts, however, respondent and
petitioner Steve H. Benavidez (Benavidez) agree that Benavidez
failed to report taxable income of $8,646, rather than $16,046,
for the 1992 taxable year.
These cases have been consolidated for purposes of trial,
briefing, and opinion.
After concessions by Benavidez,1 the issue for our
consideration is whether the transaction between petitioners
should be treated as a sale-leaseback or a financing arrangement.
FINDINGS OF FACT2
Petitioners Lauro and Gayle Guaderrama (the Guaderramas) and
Benavidez resided in Las Cruces, New Mexico, at the time their
petitions were filed in these consolidated cases.
Prior to 1991, Benavidez owned a restaurant and bar called
Steve’s Tavern. Steve’s Tavern burned down in 1989. Steve’s
Tavern was insured, and Benavidez received the insurance proceeds
approximately 6 to 8 months after the fire. The insurance
1
The parties have stipulated that petitioner Steven H.
Benavidez (Benavidez) is not entitled to a deduction for
amortization of the cost of his liquor license.
2
The stipulation of facts and exhibits attached thereto are
incorporated herein by this reference.
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proceeds, however, were not used to construct a new restaurant
and bar because by the time the insurance company paid Benavidez
the liquor license would have possibly lapsed due to inoperation
of the bar.
Benavidez purchased a tract of real property located in Dona
Ana County, New Mexico, from Rodolfo Saenz (Saenz) to be the site
for a new restaurant and bar. Under the contract dated July 31,
1990, Benavidez was to pay Saenz $35,000 for the land. This
payment was structured to require a $10,000 downpayment, with the
$25,000 balance payable in equal annual installments of $6,594.94
for a period of 5 years, the first payment being due on July 15,
1991. Saenz deeded the land to Benavidez on July 31, 1990.
After obtaining the land from Saenz in July 1990, Benavidez
attempted to obtain financing through banks to build a new
restaurant but was turned down by two or three different banks.
The banks would not provide financing to Benavidez because they
were unwilling to accept the only asset he had--his liquor
license--as collateral. Benavidez had purchased his liquor
license in 1985 for approximately $45,000. The availability of
alcoholic beverages, in general, attracts more business to a
restaurant, and a liquor license can cost as much as $100,000 to
$200,000 in Dona Ana County, New Mexico.
Consequently, Benavidez entered into negotiations with Lauro
Guaderrama (Guaderrama), a farmer in New Mexico during the years
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in question, regarding construction of a new restaurant and bar
to be named Severo’s. Guaderrama had never constructed
commercial property before, but he studied the proposed
transaction and concluded that it would be a good investment.
Guaderrama and Benavidez subsequently entered into several
agreements. On July 26, 1991, Benavidez deeded the tract of land
in Dona Ana County to the Guaderramas. Guaderrama then lent
Benavidez $25,000 to pay off the outstanding amount under the
real estate contract between Benavidez and Saenz. On October 9,
1991, Guaderrama entered into a construction agreement with JVG
Construction Co. providing for the construction of Severo’s. JVG
Construction Co. is operated by Guaderrama’s nephew, and
Guaderrama financed the construction of Severo’s with his
savings. Benavidez designed the floor plan for Severo’s, while a
contractor designed the rest of the restaurant.
On December 4, 1991, the Guaderramas leased the land in Dona
Ana County to L&G Investments Ltd. (L&G). L&G, a New Mexico
corporation wholly owned by the Guaderramas, was incorporated on
December 13, 1991, and is structured as an S corporation for
Federal income tax purposes. L&G does not have bank accounts and
did not file a Form 1120-S, U.S. Income Tax Return for an S
Corporation, for the 1993 tax year.
On December 10, 1991, Benavidez sold his liquor license to
L&G for $10 and assigned the trade name “Severo’s” and its
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telephone number to L&G for no consideration. At the same time,
Guaderrama, as president of L&G, executed a lease with Benavidez
that provided for monthly rental payments of $3,031.34 by
Benavidez. Although the lease agreement was between Benavidez
and L&G, Benavidez’ payments were made directly to Guaderrama.
Under the lease agreement, Benavidez agreed to make payments for
a period of 15 years. The monthly payments represented an
amortization of the construction costs of Severo’s, calculated at
a 15-percent interest rate. In a letter from Guaderrama’s
attorney, Steven Fairfield (Fairfield), to Benavidez, Fairfield
referred to the payments as Guaderrama’s costs plus an interest
component. After 10 years, Benavidez had the option to purchase
Severo’s for 125 percent of the remaining balance. Benavidez
intended to exercise the option to purchase Severo’s and sought
financing from the Small Business Administration (SBA).
The lease agreement was subsequently amended in May and June
1992 to account for additions to Severo’s and loans made by
Guaderrama to Benavidez for furniture to be used in Severo’s.
The final lease agreement provided for monthly payments of
$3,821.70. This monthly payment was based on Guaderrama’s total
construction costs of $272,237.26, which included the $25,000
that Guaderrama lent Benavidez to pay off the note for the land,
and again also included an interest component on Guaderrama’s
expenses at a rate of 15 percent.
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Under the lease agreement, all costs, expenses, and
obligations relating to Severo’s, including taxes, utilities, and
insurance, were to be paid by Benavidez. Guaderrama was to be
indemnified by Benavidez for any costs or expenses paid by
Guaderrama. If Severo’s was partially or totally destroyed and
had to be repaired or rebuilt, Benavidez was not allowed to abate
the rent. Under the lease agreement, Guaderrama was not liable
for any damage to persons or property arising from any cause.
If there was an accident on the premises, Benavidez, not
Guaderrama, would be liable.
The Guaderramas reported the transaction as a lease on their
Federal income tax returns for taxable years ending January 31,
1993 and 1994. Benavidez reported the transaction consistent
with a financing arrangement on his Federal income tax return for
the 1992 and 1993 taxable years.
Respondent took a protective position in his notices of
deficiency and with respect to the Guaderramas, treated the
transaction as a sale and with respect to Benavidez, treated the
transaction as a lease. In the notice of deficiency issued to
the Guaderramas, respondent increased capital gain income for the
year ended January 31, 1993, and increased interest income for
the years ended January 31, 1993 and 1994. In the notice of
deficiency issued to Benavidez, respondent disallowed interest
expense and depreciation deductions for the 1992 and 1993 taxable
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years. At the time the notices of deficiency were issued,
respondent believed the transaction was a sale of the premises,
liquor license, and equipment by the Guaderramas back to
Benavidez that resulted in capital gains. After trial, however,
respondent in his brief took the position that Benavidez did not
relinquish ownership of the property and liquor license to the
Guaderramas, and therefore the transaction was not a sale, but
rather a financing arrangement between petitioners.
OPINION
We must decide whether the parties’ transaction was in
substance a “sale-leaseback”3 or a financing arrangement. The
Guaderramas contend that the transaction was a lease, while both
respondent and Benavidez contend that the transaction was a
financing arrangement.
I. Standard of Proof
Before we analyze the transaction, we must first determine
whether Benavidez or respondent should be allowed to ignore the
3
The transaction could not be a true sale-leaseback because
petitioner Lauro G. Guaderrama (Guaderrama) constructed a
building on the land that was transferred by Benavidez, and
therefore Severo’s was not “sold” to Guaderrama and then
subsequently leased back to Benavidez. However, when taking into
account the transfer by Benavidez of the land, liquor license,
trade name and telephone number, all of which petitioners Lauro
G. and Gayle W. (the Guaderramas) argue were subsequently
“leased” back to Benavidez, the form of this transaction is
analytically similar to a sale-leaseback. Thus, it is
appropriate to consider those factors traditionally associated
with sale-leaseback transactions for purposes of determining the
proper characterization of this transaction.
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transactional form where, as here, the transaction was labeled a
“lease”. A party seeking to overcome the form of an agreement
must present “strong proof” for the substance to prevail. Ullman
v. Commissioner, 264 F.2d 305, 308 (2d Cir. 1959), affg. 29 T.C.
129 (1957); Coleman v. Commissioner, 87 T.C. 178, 202 (1986),
affd. without published opinion 833 F.2d 303 (3d Cir. 1987). A
party has adduced “strong proof” when he has essentially shown
that the terms of the written agreement do not have “some
independent basis in fact or some arguable relationship with
business reality such that reasonable * * * [people], genuinely
concerned with their economic future, might bargain for such an
agreement.” Schulz v. Commissioner, 294 F.2d 52, 55 (9th Cir.
1961), affg. 34 T.C. 235 (1960).
The Guaderramas argue that we should instead apply the more
restricted view of the Court of Appeals for the Third Circuit in
Commissioner v. Danielson, 378 F.2d 771 (3d Cir. 1967), vacating
and remanding 44 T.C. 549 (1965).4 This Court, however, has
refused to apply the standard of Danielson except under the
holding of Golsen v. Commissioner, 54 T.C. 742, 756-757 (1970),
4
Under the “Danielson rule”, a party can challenge the tax
consequences of his or her agreement as construed by the
Commissioner only by adducing proof which in an action between
the parties to the agreement would be admissible to alter that
construction or to show its unenforceability because of mistake,
undue influence, fraud, duress, etc. See Commissioner v.
Danielson, 378 F.2d 771, 775 (3d Cir. 1967), vacating and
remanding 44 T.C. 549 (1965).
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affd. 445 F.2d 985 (10th Cir. 1971), in cases appealable to the
Court of Appeals for the Third Circuit or other circuits which
have adopted Danielson. Since the Court of Appeals for the Tenth
Circuit, to which this case is appealable absent stipulation to
the contrary, has not explicitly adopted Danielson, we decline to
apply that standard here.5
In this case, one, namely petitioner Benavidez, of two
competing petitioners and respondent both seek to ignore the
transactional form. We have observed that “the taxpayer may have
less freedom than the Commissioner to ignore the transactional
form that he has adopted.” Bolger v. Commissioner, 59 T.C. 760,
767 n.4 (1973); Coleman v. Commissioner, supra at 202. The
strong proof doctrine, however, is not applied to the
Government’s attack on the form of a transaction. The present
case is a consolidated proceeding, and each petitioner is
litigating against the Government. Because the form of the
transaction in this case is being attacked by the Government, and
because both the “lessor” and “lessee” are parties to this
proceeding, the strong proof doctrine is not applicable. Cf.
5
The Guaderramas cite Munroe v. Commissioner, 961 F.2d 220
(10th Cir. 1992), as standing for the proposition that the Court
of Appeals for the Tenth Circuit has adopted Commissioner v.
Danielson, supra. Munroe, however, simply references Danielson
in a string citation and does not explicitly adopt the standard
enunciated in Danielson. Further, Munroe is an unpublished order
of the Court of Appeals which specifically states that it has no
precedential value. Thus, we do not read Munroe as adopting
Danielson.
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Freeport Transport Inc. v. Commissioner, 63 T.C. 107 (1974)
(Danielson rule did not apply in circumstances in which both
parties to the agreement were before the Court and respondent did
not object to the presentation of evidence varying the terms of
the agreement); Peterson Machine Tool, Inc. v. Commissioner, 79
T.C. 72, 82 (1982) (“in view of the fact that both the buyer and
the sellers are parties to this proceeding, there is even less
reason to apply the ‘strong proof’ rule”). Thus, this Court may
look to the substance of the transaction in order to determine
the correct tax consequences. See Hamlin’s Trust v.
Commissioner, 209 F.2d 761, 764 (10th Cir. 1954) (“It is well
settled that the incidence of taxation depends upon the substance
of a transaction * * * that the Government may look at the
realities of a transaction and determine its tax consequences
despite the form or fiction with which it was clothed.”), affg.
19 T.C. 718 (1953).
II. Sale-Leaseback or Financing Arrangement
The Guaderramas contend that the documents in this case
label the transaction a lease, that they clearly possessed the
benefits and burdens of ownership of Severo’s, and therefore the
transaction should be viewed as a lease. Benavidez, on the other
hand, argues that he possessed the benefits and burdens of
ownership of Severo’s and that the transaction should therefore
be viewed as a financing arrangement. Respondent also takes the
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position that the substance of the transaction is a financing
arrangement.
As stated above, the labels used in formal written documents
do not necessarily control the tax consequences of a given
transaction; this Court may look to the substance of the
transaction in order to determine the correct tax consequences.
It is well established that the economic substance of a
transaction, rather than its form, controls for Federal tax
purposes. See Gregory v. Helvering, 293 U.S. 465 (1935); Frank
Lyon Co. v. United States, 435 U.S. 561 (1978). Thus, the fact
that the documents contain labels that the transaction is a lease
does not govern, and this Court must consider the substance of
the transaction between petitioners.6
Whether a transaction is a sale-leaseback or a financing
arrangement for Federal tax purposes depends on all of the facts
and circumstances. See Frank Lyon Co. v. United States, supra
6
Nominally, there are three parties to the transaction at
issue--the Guaderramas, Benavidez, and L&G. While some corporate
formalities with respect to L&G appear to have been satisfied,
L&G lacks any real economic involvement in this transaction. It
was incorporated after the transaction was completed, had no
employees, conducted no business, was formed solely for this
transaction and, according to Guaderrama, functioned for the
purpose of shielding the Guaderramas from liability for the
liquor sales. Furthermore, payments by Benavidez under the
“lease” were made directly to the Guaderramas. Despite the lack
of corporate formalities, however, it is unnecessary for us to
decide whether L&G should be disregarded for Federal tax purposes
because it is a pass-through entity and thus, any taxable income
from the transaction is attributed to the Guaderramas, the real
parties in interest to the transaction.
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(the Supreme Court utilized a factual analysis in determining
that the transaction was a sale-leaseback). This Court has
traditionally treated a sale-leaseback as a sham transaction if
the taxpayer was motivated by no business purpose other than tax
benefits and if the transaction has no economic substance because
no reasonable possibility of a profit exists. See Rice’s Toyota
World Inc. v. Commissioner, 81 T.C. 184 (1983), affd. in part,
revd. in part 752 F.2d 89 (4th Cir. 1985). In deciding whether a
transaction should be treated as a sale-leaseback or a financing
arrangement for Federal tax purposes, we often consider factors
such as: (1) Whether the purchase price of the original sale-
leaseback received by the “lessee” is less than the fair market
value of the property; (2) who bears the risks and
responsibilities of ownership; (3) the terms under which the
payments are made; (4) whether the repurchase price is less than
the fair market value of the property; (5) who participates in
the profits or appreciation in value of the property; and (6) the
intent of the parties. See, e.g., Helvering v. F.& R. Lazarus &
Co., 308 U.S. 252 (1939); Sun Oil Co. v. Commissioner, 562 F.2d
258 (3d Cir. 1977), revg. T.C. Memo. 1976-40; American Realty
Trust v. United States, 498 F.2d 1194 (4th Cir. 1974); Illinois
Power Co. v. Commissioner, 87 T.C. 1417 (1986); Hilton v.
Commissioner, 74 T.C. 305 (1980), affd. 671 F.2d 316 (9th Cir.
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1982); Belz Inv. Co. v. Commissioner, 72 T.C. 1209 (1979), affd.
661 F.2d 76 (6th Cir. 1981).
In examining whether the transaction between the two
petitioners was a sale-leaseback or a financing arrangement, we
find the following factors to be particularly persuasive:
Conveyance of the Liquor License
In Helvering v. F.& R. Lazarus & Co., supra, the Supreme
Court found a transaction to be a financing arrangement instead
of a sale-leaseback in part because the instrument under which
the taxpayer purported to convey legal ownership to the bank was
in reality given and accepted as security. Here, the conveyance
of the liquor license reflects a financing arrangement rather
than a bona fide arm’s-length sale. While Benavidez purchased
the liquor license for approximately $45,000, the purchase price
paid by Guaderrama to Benavidez for the liquor license was only
$10. According to Benavidez, liquor licenses in Dona Ana County
currently average between $100,000 to $200,000. While we do not
necessarily accept Benavidez’ testimony as establishing the worth
of a New Mexico liquor license, the fact that Guaderrama was
willing to hold it as collateral towards an approximately
$272,000 debt indicates that $10 is far from its fair market
value. Thus, although legal title of the liquor license may have
been transferred to Guaderrama, it was not an arm’s-length
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purchase, but rather simply a transfer of property to be held as
collateral in a financing arrangement.
Risks and Responsibilities
For purposes of determining the tax consequences of the
transaction, another factor we consider is who bears the risks
and burdens of ownership. Under the arrangement between the two
parties, Benavidez is responsible for all taxes, utilities, and
insurance and assumed the full burden and cost of keeping the
premises in good condition. Benavidez is also responsible for
all repairs or any damage to the premises, and Guaderrama is not
liable for any damage to persons or property arising from any
cause whatsoever. Benavidez agreed to indemnify and hold
harmless Guaderrama from any and all claims and liability for
damage to persons or property arising from any cause. Moreover,
diminution of rental payments even in the event of a casualty or
total destruction is not allowed. Thus, inconsistent with
customary leases, this “lease” imposes essentially all of such
burdens, risks, and responsibilities for the property upon
Benavidez.
The Terms of the Payments
The rental payment in this transaction is based on the
construction costs of the restaurant plus 15 percent interest.
The inclusion of an interest component is indicative of a
financing arrangement. See Judson Mills v. Commissioner, 11 T.C.
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25 (1948). Under the terms of the “lease”, payments are to be
made over a 15-year period, beginning in May 1992, and consist of
monthly payments of $3,821.70. In determining the monthly
payment, the cost of construction, $272,237.26, was amortized
over a 15-year period at a 15-percent interest rate. The rents
have no ascertainable connection to the economic value of the
property but instead are related to a fixed interest return on
the advances or costs of constructing the property. This is
consistent with a financing arrangement, not a lease.
The Option To Purchase
A repurchase provision of a sale-leaseback transaction often
serves the same function as a loan when the repurchase price is
geared to the unamortized principal advanced by the “lessor”.
See Sun Oil Co. v. Commissioner, supra. In this case, Benavidez
has the absolute right to purchase Severo’s and the liquor
license during the final 60 months of the term of the “lease”.
If the option is exercised, the purchase price of Severo’s is the
remaining balance due from Benavidez to Guaderrama plus an amount
equal to 25 percent of the unpaid balance. Thus, the option to
purchase is directly related to the unpaid balance, not to the
fair market value of the property. If Benavidez exercises the
option 1 month before the 15-year term ends, he can purchase
Severo’s for approximately $4,700, nowhere near the fair market
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value of the going business concern. This is indicative of a
financing arrangement, not a lease.
The Potential for Profit or Loss
A significant factor to be used in determining ownership of
property is the extent to which the taxpayer has potential for
profit or loss as a result of holding the property. See Frank
Lyon Co. v. United States, 435 U.S. at 579; Sun Oil Co. v.
Commissioner, 562 F.2d at 268.
In this case, the transaction severely limits Guaderrama’s
ability to participate in any appreciation in the value of the
property. Because of the repurchase option at less than fair
market value, it is a virtual certainty that Benavidez will
exercise the option and repurchase Severo’s. Thus, any
appreciation in value will be realized by Benavidez, not
Guaderrama. Furthermore, all rental payments are at a fixed
amount, with no allowance for inflation or increases in property
value.
In addition, the transaction was structured so that profits
and losses resulting from the operation of the premises will
inure to Benavidez. Benavidez owns the right to operate and use
the restaurant however he sees fit, and any profits or losses
resulting from the operation of the restaurant belong to
Benavidez. Guaderrama, on the other hand, has a fixed rate of
return. Regardless of how successful Severo’s is, Guaderrama is
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entitled to the same amount of rent. Thus, any appreciation in
the property over the term of the lease is likely to accrue to
Benavidez, not to Guaderrama, upon exercise of the option.
Guaderrama does not appear to be an equity participant with any
real profit or loss opportunities, and thus the transaction is
inconsistent with a lease.
Intent of the Parties
The record indicates that Benavidez intended for this
transaction to be a financing arrangement. He had sought
financing from banks on two or three separate occasions but had
been turned down because they would not accept the liquor license
as collateral. Benavidez testified that it was his intent to
have Guaderrama finance the construction of the new restaurant
and for Benavidez to pay him back over a period of time.
While Guaderrama’s intent is less clear, he indicated in his
testimony that he viewed the liquor license the same way that
Benavidez did--as collateral. Guaderrama further explained that
he had been getting a return of 6 or 7 percent on his savings and
was willing to use his savings to build the restaurant for
Benavidez if he charged 15 percent interest as opposed to the 6
or 7 percent return he was receiving. Thus, Guaderrama was
willing to finance the construction of Severo’s in exchange for a
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15-percent return on his investment.7 This is consistent with a
financing arrangement.
Conclusion
As “lessee”, Benavidez bore the burdens, risks, and
responsibilities for Severo’s, including the obligation to
provide Guaderrama with a fixed return under all circumstances
and conditions. This is indicative of ownership, not of a
leasehold interest. Structurally, the “lease” is very similar to
a debt financing as it contains a schedule of payments based on a
fixed interest rate. Furthermore, the rents have no connection
with the economic value of the property, but instead they are
related to a fixed interest return on the costs of construction.
As such, the Guaderramas had little potential for economic profit
other than the fixed interest income. Finally, the option to
acquire Severo’s at the end of the lease is, in essence, a form
of equity for Benavidez because the value to Guaderrama is really
just the present value of the future payments for 15 years at a
specified rate.
Based on all of the factors discussed above, we conclude
that the transaction was a financing arrangement, and Benavidez
is entitled to deduct allowable depreciation and interest expense
7
We also note that, inconsistent with their belief that the
transaction was a lease, the Guaderramas did not claim
depreciation on Severo’s as they would have been entitled to had
they truly owned the premises and simply “leased” them to
Benavidez.
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in connection with the financing arrangement, and the Guaderramas
must include interest income in connection with the financing
arrangement.
III. Allocation of Payments Between Principal and Interest
As an alternative argument, the Guaderramas contend that the
obligation owed by Benavidez was speculative and that they are
entitled to first recover their costs of the financing
arrangement. The Guaderramas contend that since Benavidez had
insufficient assets to pay for the property, since his sole
source of funds was dependent on operating the new restaurant
successfully, since his liquor operation was shut down for a
period of time, and since his option to buy was nonassignable,
repayment by Benavidez was risky, and therefore they are entitled
to first recover their costs. We disagree.
The general rule is that “periodic payments are applied
first to interest, with any remaining amount being applied to
principal, absent any agreement of the parties to the contrary”.
Estate of O’Leary v. Commissioner, T.C. Memo. 1986-212, affd. 837
F.2d 1088 (5th Cir. 1988). If, however, the obligation is
speculative, periodic payments may be applied to the principal
until costs are recovered. See Underhill v. Commissioner, 45
T.C. 489, 492 (1966). In Underhill we held that, in determining
whether a particular obligation is “speculative”, the ultimate
test is whether, at the debt’s inception, the creditor cannot be
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reasonably certain of recovering the principal and a major
portion of the discount. See id. at 495. We are not persuaded
that the loan in the present transaction was speculative.
The Guaderramas argue that Benavidez had insufficient assets
to exercise the option and purchase the property. Insufficient
assets, however, is not the test of a speculative investment for
tax purposes. In Estate of Ratliff v. Commissioner, T.C. Memo.
1995-428, we stated that “mere absence of security is not
sufficient to deem a loan speculative.” In any event, we are not
convinced that Benavidez was unable to exercise the option to
purchase the property. Indeed, Benavidez was approved for a loan
from the SBA in 1996 and was in a financial position where he
could have exercised the option. Guaderrama was apparently aware
of this since Guaderrama’s attorney sent a letter to a bank
expressing interest in selling the property to Benavidez in order
to help Benavidez qualify for a loan. Thus, the evidence in the
record suggests that Benavidez could have exercised the option.
The Guaderramas further argue that Benavidez’ sole source of
funds was dependent on operating the new restaurant successfully,
making the likelihood of repayment speculative. There is no
evidence, however, that Severo’s would not be successfully
operated by Benavidez. As Guaderrama testified, he himself had
studied the transaction and decided that it would be a good
investment. Thus, we find this argument unpersuasive. We also
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find unconvincing the Guaderramas’ argument that repayment was
risky because Benavidez had his liquor operation shut down for
some period of time. It is unclear when Benavidez had his liquor
operation shut down. Guaderrama testified that Benavidez’ bar
operations were shut down for a period of time, but he could not
recall when and stated that it was for “maybe a month or two”.
Such a vague recollection does not indicate to us that Guaderrama
was overly concerned with the temporary shutdown. Furthermore,
it does not appear that Benavidez failed to make monthly payments
during any period of temporary shutdown, and the Guaderramas have
not offered any evidence to the contrary.
Finally, we note that the loan to Benavidez was secured by
the liquor license. The Guaderramas’ possession of such
collateral makes it difficult to argue that the loan was risky.
We therefore conclude that the obligation owed by Benavidez was
not speculative or risky, and the payments received by the
Guaderramas from Benavidez under the financing arrangement must
be allocated between principal and interest.
To reflect the foregoing,
Decisions will be entered
under Rule 155.