- 28 -
such liability would only be theoretical for purposes of section
465(b)(4) during the years in question because of the underlying
nonrecourse nature of the debts of Sha-Li and RTS to MHLC under
the assignment agreements and the loan agreement, respectively.
See Waters v. Commissioner, 978 F.2d at 1317.
Petitioners do not argue that the assignment agreements
imposed any personal liability on Sha-Li, and we find that they
did not. Petitioners do argue that the loan agreement (in the
telecommunications equipment activity) did impose personal
liability on RTS. The RTS promissory note states:
MHLC ACKNOWLEDGES AND AGREES THAT THE PERSONAL
LIABILITY OF * * * [RTS] WITH RESPECT TO PAYMENT OF
SUMS EVIDENCED BY THIS NOTE IS LIMITED AND IS SUBJECT
TO THE TERMS AND CONDITIONS CONTAINED IN THE SECURITY
AGREEMENT.
Under the loan agreement, MHLC had recourse against RTS
personally on the occasion of two events of default: One, the
failure of RTS to observe certain covenants and other agreements,
excluding its failure to pay amounts due, and, two, the failure
of certain representations and warranties of RTS. Under the loan
agreement, the rental payments expected from U.S. Telephone had
been assigned to MHLC as "collateral security" for RTS' repayment
of the RTS promissory note. MHLC also had a security interest in
the telecommunications equipment. RTS bore no risk of default if
U.S. Telephone failed to make those rental payments. If U.S.
Telephone had stopped making payments under the U.S. Telephone
lease, MHLC could have looked only to its "collateral security"
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