- 15 -
the balances on the promissory notes, and thereby demonstrated
their ability to repay the obligation).
e. The Relationship of the Parties
Two facts color the transactions between petitioners and the
Plan: (1) Petitioners' status as owners, operators, employees,
and shareholders in Erie Industries; and (2) Wayne's position as
the Plan's trustee. Where the nominal creditor and debtor are
controlled by the same party and the arm's-length dealing that
characterizes the market is lacking, the substance of the
transaction and not its form is controlling. Road Materials,
Inc. v. Commissioner, 407 F.2d 1121, 1124 (4th Cir. 1969), affg.
on this issue T.C. Memo. 1967-187. In determining whether the
form of a transaction between closely related parties has
substance, we should compare their actions with what would have
occurred if the transaction had occurred between parties who were
dealing at arm's length. Peck v. Commissioner, 904 F.2d 525 (9th
Cir. 1990), affg. 90 T.C. 162 (1988); Maxwell v. Commissioner,
95 T.C. 107, 117 (1990).
We find that under the standards of parties dealing at arm's
length, the transactions at issue were not bona fide loans.
Among other things, an administrator, trustee, or other fiduciary
of a plan dealing at arm's length with a participant would not
have approved "loans" where the participant lacked any documented
ability to meet payment obligations. Although the Plan's
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