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and the execution of promissory notes. The economic positions of
the parties did not change.13 The same is true of the loan
transactions in 1994 and 1995.
The execution of the promissory notes did not result in the
parties’ becoming poorer in any material sense. The promissory
notes, with the exception of the note from HS, were all executed
by Mr. Oren as president of Dart and HL, or as an individual.
The terms of the promissory notes were not the equivalent of
terms which might appear in notes executed for the benefit of
unrelated third parties, especially in light of the size of the
loans. The loans were unsecured and were in the form of notes
due 375 days following demand. Further, petitioners, in their
various roles as the only directors, principal officers, and
majority or sole shareholders of the Dart companies, and Mr. Oren
as individual-obligee, controlled when and whether a demand for
repayment would be made.
The loan principal repayments and the payments of interest
also denote the inherent lack of substance in the loans. The
repayment of loans occurred only after respondent challenged the
13Respondent suggests that petitioners’ restructuring of
investments, if upheld, permits taxpayers to create basis “out of
thin air” and “double count” basis in two S corporations and that
there would be no limit to the amount of basis that could be
created by the simple exchange of offsetting notes.
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