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third-party lender.20 Petitioner then re-lent the proceeds of this
indebtedness to MMS, creating direct indebtedness of his S
corporation to him, within the meaning of section 1366(d)(1)(B),
in sufficient amounts to cover the losses claimed in 1992, 1993,
and 1994.
Respondent contends, however, that no substantive
indebtedness was created between petitioner and Huntington as a
result of the restructuring because MMS remained in substance the
borrower from Huntington. In respondent's view, petitioner was at
best some kind of accommodation surety with respect to the
indebtedness, a role insufficient to give him basis under section
1366(d)(1)(B). In support of this position, respondent makes
various arguments, including a claim that Huntington still held a
promissory note from MMS after the restructuring; that petitioner
was required by Huntington to assign to Huntington the promissory
note given to him by MMS in connection with the MMS/Miller Loan,
as well as all other MMS assets that had previously secured the
MMS/Huntington Loan; that the proceeds of the Miller/Huntington
indebtedness were required to be used by MMS and MMS was the
source of repayment; and that petitioner did not consistently
report interest income from the MMS/Miller Loan. Thus, in
respondent's view, petitioner's status as borrower from Huntington
20 In addition, the restrictive covenants imposed on
petitioner in connection with the Miller/Huntington Loan
significantly constrained his ability to lend and borrow money.
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