Donald J. and Judith E. Peracchi - Page 14

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          compliance with the terms of the Capital Note, it is reasonable             
          to conclude that the Capital Note's only significance was to                
          serve as a makeweight against the potential of recognition of               
          gain under section 357(c).                                                  
               We accordingly find that petitioners did not intend to pay             
          the Capital Note according to its terms, and that therefore no              
          genuine indebtedness was created.                                           
               It is noteworthy in this connection that the December 21,              
          1989, NAC Corporation board of directors' minutes makes no                  
          reference to any corporate acceptance of the Capital Note as                
          assistance in the rectification of the twin problems of net worth           
          and capital-to-premium ratio deficiencies.  Rather, insofar as              
          any corporate purpose is reflected by the minutes, the sole                 
          function of the Capital Note was to offset the difference between           
          the "allocated liability and the basis" of the Clinton Way                  
          Property; i.e., to aid NAC Corporation's sole shareholder--                 
          petitioners--in the avoidance of the recognition of gain under              
          section 357(c)(1).                                                          
               Petitioners suggest on brief (although they do not press the           
          point very vigorously) that even if their liability under the               
          Capital Note is not taken into consideration, their continuing              
          liability under both the Standard Insurance and Bunn & Duran                
          obligations avoids the requirement that they recognize gain under           
          section 357(c)(1).  This position, however, is inconsistent with            




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