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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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