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In finding that the arrangement in Grojean v. Commissioner,
supra, was in substance a mere guaranty by the taxpayer, we
emphasized several factors. First, there was no debtor-creditor
relationship between the S corporation and the taxpayer. The
taxpayer was not a party to the note between the bank and the S
corporation; he had no direct rights against the S corporation,
and the S corporation had no direct obligation to him. Instead,
the taxpayer's only contractual relationship was with the bank,
and the bank had sole discretion to enforce all rights against the
S corporation under the indebtedness. Second, the participation
agreement creating the taxpayer's participation interest provided
that the bank's interest in the S corporation's note was superior
to the participation interest. The taxpayer received interest and
principal only after the bank received its share of these items.
Third, the S corporation's certified financial statements
reflected the taxpayer's lack of creditor status, as they reported
his participation interest as a guaranty of the corporation's
indebtedness. Finally, because the bank had lent the taxpayer the
funds with which to acquire the participation interest, and the S
corporation's repayment obligation mirrored the taxpayer's
repayment obligation for the acquisition funds, the taxpayer
"would not be out-of-pocket unless and until * * * [the S
corporation] failed to make payments under the * * * note" to the
bank. Thus, we concluded, the taxpayer was in substance a
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