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obligation may not deduct the payment to satisfy the guarantee
if, considering the circumstances when the guarantee was created,
the payment constitutes a contribution to capital. Plantation
Patterns, Inc. v. Commissioner, 462 F.2d 712, 722-723 (5th Cir.
1972), affg. T.C. Memo. 1970-182. We are satisfied that the
guarantee, originally entered into with Idaho First on September,
9, 1985, was bona fide. Prior to that date, Fishfader guaranteed
Northwest's financing, and Northwest showed signs of promise. We
conclude that petitioner's payments pursuant to the guarantee
agreement were properly deducted by petitioner as bad debts.
Respondent concedes that the transactions before October 10,
1988, created bona fide debts. We do not agree with respondent
that the debt-equity analysis begins at ground zero on October
10, 1988. Forcing petitioner to run the entire debt-equity
gauntlet for every transaction after October 10, 1988, is
artificial and ignores the facts of this case. We focus on the
events that transpired between early 1988 and June 30, 1989.
In April 1988, Northwest wrote checks payable to petitioner
that the bank rejected due to insufficient funds. In October
1988, Franklin learned that Northwest was out of trust and that
Chrysler First expected payment from petitioner on the floorplan
guarantee.
The entire motor home industry suffered a slowdown in the
spring of 1988, as indicated by Northwest's competitors' selling
new coaches at cost or below cost in an attempt to move
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