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B. Debt-Equity Analysis
Clearly, the loan agreement and the note, both in form and
substance, constitute debt and not equity. The question here is
not whether the bank was a lender, which it surely was, but to
whom did it lend approximately $2 million, the corporation or the
guarantors. Apparently, petitioners wish us to consider certain
of the debt-equity factors (e.g., the adequacy of capitalization
of the corporation) to determine that, but for the guaranty, the
bank would not, on any terms, have made the loans to the
corporation. Because the bank undoubtedly lent almost $2 million
to someone, petitioner would use the hoped for results of our
debt-equity analysis to convince us that the loan must have been
to the guarantors, the only other possibility in sight.
Petitioners’ argument is not illogical. Nevertheless,
courts, including this Court and the Court of Appeals for the
Eleventh Circuit (to which any appeal of our decision likely
would lie), have been hesitant to substitute the guarantor for
the nominal borrower as the borrower-in-substance. Indeed, this
Court has stated: “We decline to apply the debt-equity analysis
used in Plantation Patterns to the guaranty of a loan to a
subchapter S corporation.” Estate of Leavitt v. Commissioner, 90
T.C. 206, 216 (1988), affd. 875 F.2d 420 (4th Cir. 1989).
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