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economic outlay--unless Schanno defaulted. This conclusion is
consistent with the treatment of the participations in Schanno’s
certified financial statements. Those statements, which were
certified as correct by the independent accounting firm and which
were reviewed by petitioner, disclosed the participations as a
guaranty by petitioner of the debt between American and Schanno.
In Underwood v. Commissioner, supra, we held that the
taxpayer’s series of interrelated transactions was tantamount to
a disguised guaranty of an S corporation’s indebtedness to a
third party. In that case, the taxpayers were the sole
shareholders of two corporations engaged in the retail barbecue
business, one a profitable C corporation (C-corp), the other an
unprofitable S corporation (S-corp). The C-corp made loans to
the S-corp over nearly a 2-year period. The S-corp gave the C-
corp promissory notes for the loans. In an attempt to acquire
additional S-corp basis, the taxpayers rearranged the notes in
three steps: (1) The C-corp surrendered the notes of the S-corp;
(2) one of the taxpayers gave a personal note to the C-corp; and
(3) the S-corp gave its note to that taxpayer. We held that the
taxpayer did not make the requisite economic outlay and that the
substance of the arrangement was similar to a guaranty of the
indebtedness. See Underwood v. Commissioner, supra at 475; see
also Estate of Leavitt v. Commissioner, 90 T.C. 206 (1988), affd.
875 F.2d 420 (4th Cir. 1989). Likewise here, we find the
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