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indebtedness to the third-party lender is extinguished, so that
the shareholder becomes the sole obligor to the lender, the
shareholder's assumption of what was formerly the S corporation's
legal burden serves as a constructive furnishing of funds to the S
corporation for which the S corporation becomes indebted to repay
to the shareholder. See Hitchins v. Commissioner, 103 T.C. at
718; Gilday v. Commissioner, supra; Rev. Rul. 75-144, supra.
Viewing the restructuring of the line of credit as a whole,
we believe that under the principles of Gilday v. Commissioner,
supra, and Raynor v. Commissioner, supra, petitioners are entitled
to the basis they have claimed. The December 30, 1992,
transaction conformed in all material respects to the note
substitution in Gilday. Petitioner gave his fully recourse $1
million promissory note to Huntington to replace MMS's promissory
note of like amount on which he had formerly served as guarantor.
Huntington thereupon advanced $750,000 under petitioner's note and
recorded MMS's note as satisfied by virtue of the payment of its
$750,000 outstanding balance. MMS in turn gave a promissory note
to petitioner which mirrored the terms of petitioner's note to
Huntington.18 Participating in the foregoing transactions was an
independent, third-party lender, a factor "critical to the result
in Gilday". Bergman v. United States, supra at 933; see also Oren
18 In Gilday, the S corporation did not execute promissory
notes in favor of the shareholders until sometime after the year
in issue.
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