* * *

(d) EXEMPTIONS. 1993 U.S. Tax Ct. LEXIS 75">*84 -- The prohibitions provided in subsection (c) shall not apply to --

(1) any loan made by the plan to a disqualified person who is a participant or beneficiary of the plan if such loan [meets five specified requirements] --

* * *

(3) any loan to a leveraged employee stock ownership plan (as defined in subsection (e)(7)), if --

* * *

(e) DEFINITIONS. --

* * *

(2) DISQUALIFIED PERSON. -- For purposes of this section, the term "disqualified person" means a person who is --

Although petitioners have not expressly agreed and merely "assume" that they are 1993 U.S. Tax Ct. LEXIS 75">*86 disqualified persons with respect to the trust, there is no doubt that they and AJVW were disqualified persons under several of the categories set forth in section 4975(e)(2).

Petitioners contend that only loans from a plan to a disqualified person are prohibited by section 4975(c)(1)(B). That contention is contrary to the plain meaning of the word "between" as used repeatedly in section 4975(c)(1) and in the parallel provisions of 29 U.S.C. sec. 1106(a)(1) (1988). See Rutland v. Commissioner, 89 T.C. 1137">89 T.C. 1137, 89 T.C. 1137">1146 (1987); Leib v. Commissioner, 88 T.C. 1474">88 T.C. 1474, 88 T.C. 1474">1480 (1987). With respect to 29 U.S.C. sec. 1106(a)(1)(B), the Court of Appeals in Brock v. Citizens Bank, 841 F.2d 344">841 F.2d 344, 841 F.2d 344">346 (10th Cir. 1988), stated:

The district court further found that any loan between a plan and a party in interest is a per se violation of 29 U.S.C. sec. 1106(a)(1)(B). The trustees contended there was no violation because they did not loan plan 101 T.C. 518">*525 assets to the Bank. The 1993 U.S. Tax Ct. LEXIS 75">*87 court correctly concluded, however, that sec. 1106 proscribes loans made by the party in interest to the plan as well as the reverse.

Loans by disqualified persons to a trust were held to be prohibited transactions under section 4975(c)(1)(B) in 89 T.C. 1137">Rutland v. Commissioner, supra at 1147, where we ruled on a taxpayer's contention that a transaction that involved both a sale and a loan to a trust could not result in cumulating amounts subject to excise tax. We stated:

In our view, each prohibited transaction enumerated in section 4975(c) was designed to guard against particular instances of over-reaching by a person able to exert influence over the affairs of such a plan. For example, section 4975(c)(1)(A), which prohibits sales of property between a plan and a disqualified person, discourages a disqualified person from charging the plan an excessive price for such property. Section 4975(c)(1)(B)prohibits a disqualified person from lending money or extending credit to a plan and thereby prevents such person from charging an excessive rate of interest or otherwise imposing unfavorable terms on such loan. We can find no indication in ERISA or1993 U.S. Tax Ct. LEXIS 75">*88 in the legislative history that the prohibited transaction restrictions are intended to be mutually exclusive. Indeed, such a view is inconsistent with ERISA's objective of preserving plan assets. We observe that a person with close ties to a plan may be able to exact terms unfavorable to such plan both on a sale of property and on a loan to the plan made for the purpose of purchasing such property. We believe that Congress drafted ERISA to prohibit both such transactions to guard against such a possibility. While the transactions at issue may not contain unfavorable terms, the "per se" rules of ERISA do not relieve the petitioners of liability under section 4975(a). For such reason, we conclude that both the sale of the property to the plan, and the issuance of the promissory note by the plan, constituted prohibited transactions. [Emphasis added.]

See also Pearland Inv. Co. v. Commissioner, T.C. Memo. 1991-562, in which we stated that the taxpayer's "advance of money to the Plan, purchase of the property, assumption of the construction indebtedness, and the issuance of the promissory note each constituted a separate 'prohibited transaction'." 1993 U.S. Tax Ct. LEXIS 75">*89 Petitioners' attempts to distinguish these cases are without merit.

The legislative history and the reasons for an absolute prohibition on certain transactions specified in section 4975(c)(1) were analyzed at length in 88 T.C. 1474">Leib v. Commissioner, supra at 1479-1481, in which we concluded that prudent investment and good faith standards were not relevant with respect to liability for the tax imposed by section 4975(a). We 101 T.C. 518">*526 also noted that the specific exemption of certain transactions assisted in interpreting the language of the statute. 88 T.C. 1474">Id. at 1478-1479. In this instance, it is apparent that the specific exemptions in section 4975(d)(1) and (3) are necessary to avoid the broad language of section 4975(c)(1)(B). Section 4975(d)(3)specifically permits "any loan to a leveraged employee stock ownership plan" -- an exemption that would be unnecessary if petitioners' interpretation of section 4975(c)(1)(B) were correct.

The above-quoted language from Rutland also refutes petitioners' contention that the policy of section 4975(c) applies only to loans from a plan to disqualified persons. As the Supreme Court recently1993 U.S. Tax Ct. LEXIS 75">*90 stated in Commissioner v. Keystone Consol. Indus., Inc., 508 U.S.   ,    , 113 S. Ct. 2006">113 S. Ct. 2006, 113 S. Ct. 2006">2012 (1993):

Before ERISA's enactment in 1974, the measure that governed a transaction between a pension plan and its sponsor was the customary arm's-length standard of conduct. This provided an open door for abuses such as the sponsor's sale of property to the plan at an inflated price or the sponsor's satisfaction of a funding obligation by contribution of property that was overvalued or nonliquid. Congress' response to these abuses included the enactment of ERISA's sec. 406(a)(1)(A), 29 U.S.C. sec. 1106(a)(1)(A), and the addition of sec. 4975 to the Internal Revenue Code.

Congress' goal was to bar categorically a transaction that was likely to injure the pension plan. S.Rep. No. 93-383, [(1973), 1974-3 (Supp.) C.B. 80, 174-175] pp. 95-96. * * *

In Westoak Realty & Inv. Co. v. Commissioner, 999 F.2d 308">999 F.2d 308, 999 F.2d 308">310 (8th Cir. 1993), affg. T.C. Memo. 1992-171, the court explained:

Prior to Congress' enactment of sec. 4975, prohibited transactions rules1993 U.S. Tax Ct. LEXIS 75">*91 relied on an "arm's-length" standard of conduct. However, because this standard required substantial enforcement resulting in questionable effectiveness, Congress replaced the "arm's-length" standard with a per se rule to "substantially strengthen" the laws governing prohibited transactions. S.Rep. No. 383, 93d Cong., 1st Sess. 32 (1974), reprinted in 1974 U.S.C.C.A.N. 4890, 4917; see also Wood [v. Commissioner], 955 F.2d [908] at 911-912 [(4th Cir. 1992)]. Congress' goal was to bar categorically a transaction that was likely to injure the pension plan. Commissioner v. Keystone Consolidated Industries, Inc., 508 U.S.   , 113 S.Ct. 2006, 124 L. Ed. 2d 71 (1993). This purpose of maintaining the integrity of pension plans is reflected in the Senate Finance Committee Report on ERISA, S.Rep. No. 383, reprinted in 1974 U.S.C.C.A.N. at 4916:

101 T.C. 518">*527 [u]nfortunately, instances have arisen in which pension funds have been used improperly by plan managers and fiduciaries. The committee believes that this situation should not be permitted to continue and has adopted measures designed to reduce 1993 U.S. Tax Ct. LEXIS 75">*92 substantially the potentialities for abuse in this regard.

The Committee noted that the new rules (sec. 4975) would make enforcement more practical and better ensure the integrity of benefit plans.

The structure of sec. 4975 reflects Congress' purpose not just to tax abusive transactions, but to eliminate the "potentialities for abuse." Section 4975imposes two levels of excise tax on "any disqualified person who participates in [a] prohibited transaction." The first level imposes a tax on the disqualified person equal to five percent of the amount involved in the prohibited transaction. The second level imposes an additional tax on the prohibited transaction equal to 100% of the amount involved if the transaction is not timely corrected. * * *

Thus, both the language of the statute and the legislative intent compel the conclusion that loans by disqualified persons to plans are absolutely prohibited.

Petitioners also contend that execution of guarantees on behalf of a plan are not reasonably interpreted as "extension of credit." Section 4975(c)prohibits transactions that are engaged in directly or indirectly. Cf. Commissioner v. Keystone Consol. Indus., Inc., supra.1993 U.S. Tax Ct. LEXIS 75">*93 An individual who guarantees repayment of a loan extended by a third party to a debtor is, although indirectly, extending credit to the debtor.

Petitioners argue that the guarantees did not constitute an extension of credit by them to the trust because the guarantees were conditioned on default by the trust and no default ever occurred. Petitioners' interpretation, however, would render meaningless the use in the statute of different terms, to wit, "loans" and "extensions of credit" and "direct" and "indirect". The Supreme Court has already said, in Keystone Consol. Indus., that use of the latter terms requires that the statute be read broadly and that the terms describing the types of transactions that are prohibited are to be given their usual meanings in other areas of the tax laws. Congressional intent that guarantees be included within the concept of "extension of credit" for purposes of ERISA is expressly set forth in the H. Conf. Rept. 93-1280 (1974), 1974-3 C.B. 415, 469, which states that "a prohibited transaction generally 101 T.C. 518">*528 will occur if a loan to a plan is guaranteed by a party-in-interest".

If petitioners had directly agreed1993 U.S. Tax Ct. LEXIS 75">*94 to provide a line of credit to the trust, the agreement would be a prohibited transaction for the same reasons that loans by petitioners to the trust, such as those previously discussed, are prohibited by section 4975(c). Until the trust drew on the line of credit, there would not be a prohibited loan, but the contract to make a loan is also prohibited as an extension of credit.

In the case of a guarantee:

instanter upon the payment by the guarantor of the debt, the debtor's obligation to the creditor becomes an obligation to the guarantor, not a new debt, but, by subrogation, the result of the shift of the original debt from the creditor to the guarantor who steps into the creditor's shoes. * * * [Putnam v. Commissioner, 352 U.S. 82">352 U.S. 82, 352 U.S. 82">85 (1956); fn. ref. omitted.]

It is not enough to say, as petitioners do, that there is a difference between a loan and a guarantee. The guarantee is, in effect, also a contract to make a loan to the trust. It cannot be avoided at the time of default on the ground that petitioners did not intend to engage in a loan transaction prohibited by section 4975(c). The potential for abuse has been set in motion by1993 U.S. Tax Ct. LEXIS 75">*95 the contract, and thus the contract, the guarantee, is prohibited whether or not the condition for liability to the third party has arisen.

Petitioners contend that there can be no prohibited transaction excise tax imposed upon AJVW for 1987, the year after its liquidation and dissolution. Respondent argues that, under N.M. Stat. Ann. sec. 53-16-24 (Michie 1983), the dissolution of a corporation does not take away or impair any remedy available to or against the corporation or its shareholders for any right or claim existing, or any liability incurred, prior to the dissolution. Respondent argues, therefore, that AJVW was liable for the tax on prohibited transactions with respect to advances made prior to and including September 24, 1987, the day before it was released from its continuing guarantee by Sunwest. Petitioners contend that Sunwest had no cause of action against the guarantors in 1987, because there was never a default by the trust.

101 T.C. 518">*529 AJVW continued to be liable on the guarantee until that guarantee was released, regardless of whether or not there was a default. The continuing guarantee, as discussed above, is the basis for liability1993 U.S. Tax Ct. LEXIS 75">*96 for excise taxes under section 4975(a). That liability arose at the time of the guarantee and it continued as long as the guarantee continued, and the corporation continued to be liable for excise tax until the guarantee was released.

In defining the amount involved for purposes of section 4975(a), section 4975(f)(4) provides as follows:

The term "amount involved" means, with respect to a prohibited transaction, the greater of the amount of money and the fair market value of the other property given or the amount of money and the fair market value of the other property received; * * * For purposes of the preceding sentence, the fair market value --

(A) in the case of the tax imposed by subsection (a), shall be determined as of the date on which the prohibited transaction occurs; * * *

Petitioners contend that respondent is trying to "double aggregate" the computation of the 5-percent tax under section 4975(a). The difference between the parties is illustrated with reference to specific loan transactions (other than the $ 500,000 transactions and the guarantees) as follows:

Respondent's Computation

101 T.C. 518">*530 Petitioners' Computation

Under section 4975(a), the tax is imposed on each prohibited transaction at the rate of 5 percent of the amount involved "for each year (or part thereof)" in the taxable period. Thus, as respondent argues, loans outstanding at the end of the 1993 U.S. Tax Ct. LEXIS 75">*98 previous year are new prohibited transactions on the first day of the next year for purposes of computing the amounts involved. See Rutland v. Commissioner, 89 T.C. 1137">89 T.C. 1137, 89 T.C. 1137">1151 (1987); Lambos v. Commissioner, 88 T.C. 1440">88 T.C. 1440, 88 T.C. 1440">1451-1453 (1987); cf. Hockaden & Associates, Inc. v. Commissioner, 800 F.2d 70">800 F.2d 70 (6th Cir. 1986), affg. 84 T.C. 13">84 T.C. 13 (1985).

Petitioners contend that the "net increase over the year" is the only amount that should be subject to tax on the first day of the following year. Respondent correctly treated the gross amount of the loans as prohibited transactions subject to tax during the years the loans remained outstanding. See Westoak Realty & Inv. Co. v. Commissioner, 999 F.2d 308">999 F.2d 308 (8th Cir. 1993), affg. T.C. Memo. 1992-171; Leib v. Commissioner, 88 T.C. 1474">88 T.C. 1474, 88 T.C. 1474">1486-1487 (1987).