- 34 -
on the other, the present arrangements fall outside our holding in
Grojean. Upon completion of the loan restructuring, MMS's
original indebtedness to Huntington (the MMS/Huntington Loan) was
recorded by the bank as satisfied, and petitioner held MMS's note
(and related security agreement) under which MMS was directly
indebted to petitioner and petitioner had direct, unsubordinated
rights as creditor against MMS. Under the principles of Gilday,
petitioner's substitution of his note for MMS's note with
Huntington constituted a constructive furnishing of funds to MMS
by petitioner, giving rise to direct indebtedness. On MMS's
financial statement and tax return for 1992, and its tax returns
for 1993 and 1994,24 the restructured indebtedness was reported as
a loan from a shareholder, not a shareholder guaranty. Pursuant
to the later modifications to the loan agreements, under which
additional amounts were advanced to MMS, petitioner obtained funds
from Huntington in exchange for his note, which were then provided
to MMS in exchange for MMS's note to petitioner, in conformance
with the back-to-back loan transactions that gave rise to basis in
Raynor.
The Court of Appeals for the Seventh Circuit, to which an
appeal in this case lies, affirmed our decision in Grojean,
applying substance-over-form principles. Grojean v. Commissioner,
24 MMS's financial statements for 1993 and 1994 are not in
the record.
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