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supports respondent's contention in this regard. Except for the
insurance companies, all parties to the transactions profited;
the Schwabs received commissions in excess of the amounts
dispersed through their controlled entities; petitioners received
life insurance coverage at no cost for a limited period. No one
seemed particularly concerned about whether the debts would be
satisfied. Under the circumstances, the legitimacy of the debt
evidenced by each note has not been established.
Our conclusion in this regard is bolstered by the following:
(1) At the option of the makers, the notes were payable only from
the death benefit proceeds of the life insurance policies, a
contingency that made collectibility uncertain, at best; (2)
there was never an intent by the makers to continue full coverage
under the life insurance policies beyond the initial periods,
rendering the notes uncollectible after those periods; and (3)
the holders never took the necessary steps to validate the
assignments in order to protect the collateral, actions that we
expect would routinely be taken by legitimate creditors.
Consequently, we find that the insurance coverage that
Charles Sutter received under the Royal policy in 1991 and the
insurance coverage that Cheryl Sutter received under the Columbus
policy in 1992 were obtained in return for notes that did not
represent bona fide indebtedness. It follows that petitioners
realized and must recognize income during those years to the
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