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interentity loans from Paulan to Sidal that did not increase
petitioners’ debt bases in Sidal, and that petitioners had zero
bases in Sidal during the audit years.
C. Applicable Caselaw
1. Introduction
There are two types of payments at issue: (1) the wire
transfer payments, which were made by Paulan to petitioners and,
then, by petitioners to Sidal, and (2) the Paulan direct
payments, which, in form, were made by Paulan directly to Sidal.
In each case, for petitioners to prevail, the evidence must show
that they, not Paulan, made loans to Sidal, and that Sidal’s
resulting indebtedness ran directly to them, not to Paulan. See,
e.g., Prashker v. Commissioner, 59 T.C. 172, 176 (1972) (“[t]he
key question is whether or not the debt of the corporation runs
‘directly to the shareholder’”.). A finding that Sidal’s
indebtedness ran to Paulan, a partnership with passthrough
characteristics, rather than directly to petitioners, its
partners, would not satisfy that requirement. See Frankel v.
Commissioner, 61 T.C. 343 (1973), affd. without published opinion
506 F.2d 1051 (3d Cir. 1974). Moreover, the evidence must show
that the payments created indebtedness from Sidal to petitioners
on the dates of each payment to Sidal. Petitioners’ subsequent
recharacterization of those payments as back-to-back loans,
through them, would not, on account of that recharacterization,
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