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* * * such reclassification is insufficient to
create “indebtedness of the corporation to the
shareholder” withing the meaning of * * * [the
predecessor of section 1366(d)(1)(B)]. * * *
Similarly, we do not believe that the yearend adjusting entries
overseen by Michel with respect to some, but not all, of the
Paulan direct payments were sufficient to justify treating those
payments as giving rise to indebtedness from Sidal to petitioners
on the dates the payments were made. At best, they caused a
yearend reclassification of Sidal’s original debt to Paulan,
which was insufficient to provide petitioners with debt bases in
Sidal under section 1366(d)(1)(B). See Underwood v.
Commissioner, 535 F.2d 309 (5th Cir. 1976); Bhatia v.
Commissioner, T.C. Memo. 1996-429; Shebester v. Commissioner,
T.C. Memo. 1987-246; Burnstein v. Commissioner, supra.
(6) Conclusion
For the reasons stated, we find that, despite petitioners’
overall intent to take the steps necessary to establish tax bases
in Sidal beginning in 1997, the steps taken (the promissory
notes, the minutes, and the accounting entries) were ineffective
to carry out that intent. At best, those steps amounted to a
reclassification of initial indebtedness from Sidal to Paulan.
Put quite simply, petitioners, in conjunction with Michel, paid
insufficient attention to detail. Another example of that
failing is exemplified by the failure to have Sidal issue
information returns (IRS Forms 1099) to petitioners in connection
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