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By late 1992, it was apparent that MMS's operations for that year
would also show a loss.4
The Loan Restructuring
In December 1992, personnel of MMS had discussions with
Huntington concerning the tax benefits of reissuing the line of
credit in the MMS/Huntington Loan to petitioner personally. On
December 17, 1992, petitioner's tax adviser at Ernst & Young sent
a letter to Huntington explaining that petitioner did not have
sufficient basis to deduct his share of MMS’s losses because of
his status as a mere guarantor of the MMS/Huntington Loan. The
letter therefore proposed that the line of credit be reissued to
petitioner personally, with MMS as guarantor, using the same
terms and conditions. Huntington would then lend $750,000 (the
then-outstanding principal balance on the MMS/Huntington Loan) to
petitioner and petitioner would make a $750,000 cash contribution
to MMS, which MMS would use to repay the MMS/Huntington Loan. The
letter concluded by emphasizing that the new credit line would
need to be established before the end of the year to enable
petitioner to deduct his share of MMS's losses for 1992.
In response, Huntington agreed to reissue the line of credit
to petitioner personally with essentially the same terms and
conditions (including the Rapp Group guaranties) as the
4 In fact, MMS ultimately reported a 1992 net operating loss
for Federal income tax purposes of $736,237.
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