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the statutory requirement. Respondent proposes Underwood v.
Commissioner, 63 T.C. 468 (1975), affd. 535 F.2d 309 (5th Cir.
1976), as a model for us to follow in this case. In Underwood,
the taxpayer’s S corporation was indebted to a second corporation
owned by him. The taxpayer interposed himself between the two
corporations by causing the corporations to substitute for the
one-legged indebtedness running between the S corporation and the
second corporation a two-legged indebtedness, running, first,
from the S corporation to him and, second, from him to the second
corporation. We concluded that the taxpayer had paid out no
funds and would not until his note to the second corporation came
due. On that basis, we were unable to distinguish his liability
from that of a guarantor, who makes no investment until he pays
his obligation. See id. at 475-476. We relied on a long list of
cases for the proposition (which we applied to the taxpayer)
“that basis-giving indebtedness for the purposes of section
1374(c)(2)(B) does not arise where a shareholder merely
guarantees a subchapter S corporation’s debt”.8 Id. at 475.
That is true, but that is not the case here.
8 Sec. 1374(c)(2)(B), as in effect at the time,
determined basis in indebtedness as of the close of the
corporation’s year.
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