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Marky Kay6/15/2003
ts the liability of the surety (guarantor). Restatement (Third) of Suretyship and Guaranty § 41 (1996).
Under the agreements involved here, however, the putative guarantor (taxpayer) has the power to unilaterally choose critical components that define the underlying obligation, such as the interest rate to be used in calculating rent. The putative guarantor also has the ability to change the terms of the underlying obligations through agreement with the creditor (ARI), without the consent of the putative lessee/debtor (Consultants). Each of these facts is a strong indication that, in substance, the putative guarantor is, in fact, the principal obligor.
The nature and satisfaction of payment obligations under the terms of the documents and in practice are also indicators of taxpayer's role as principal obligor rather than guarantor. Actual payment to ARI comes from taxpayer and not the Consultants. More importantly, the payment obligation is fully recourse to taxpayer. However, the payment obligation is not, in practice, recourse to each Consultant.
Notwithstanding the formal obligation of each Consultant to pay rent to ARI, a Consultant can walk away from or become disqualified from the Career Car Program and have no personal liability to ARI.
(2) Recourse and Non-recourse Nature of Various Obligations
The non-recourse obligation of each participating Consultant should also be compared to the recourse obligation that exists between taxpayer and each participating Consultant. If a Consultant qualifies for the Career Car Program, taxpayer makes the full rental payment due to ARI and reports the payment as an additional commission to the Consultant. If a Consultant falls below the required production level, taxpayer continues to make the full rental payment to ARI and requires a co-payment from the Consultant to taxpayer. In such situations, taxpayer may offset any co payment amount due against any commissions due from taxpayer to the Consultant. If the offset is insufficient, the Consultant has a personal obligation to pay taxpayer any amount due.
Taxpayer argues that the substance of the transaction at issue is a direct lease from ARI to the Consultants with taxpayer being only a guarantor. However, the non-recourse relationship between each Consultant and ARI stands in stark contrast with the fact that taxpayer has a fully recourse obligation to ARI under the agreements. Indeed, that obligation is described in the controlling document - the Guaranty Agreement - as primary. The fact that the ARI Consultant relationship is non-recourse is inconsistent with taxpayer's argument, especially considering taxpayer has a recourse obligation to ARI and a recourse right to collect from Consultants.
This constellation of recourse and non-recourse relationships strongly suggests that taxpayer is the lessee from ARI and then makes the use of cars available to the Consultants through a sublease or license. No recourse relationship exists between the Consultants and ARI. Instead, through the Guaranty Agreement taxpayer creates a recourse relationship between itself and ARI. Taxpayer also creates a related recourse relationship between itself and the Consultants through its Program Agreement. Notably absent is any recourse relationship between ARI and the Consultants.
The structure of the recourse financial relationships strongly indicates the reality of relationships for tax purposes.
c. Insurance
Although the ARI Agreement provides that the "lessee" will obtain insurance with a minimum single limit of $500,000 for personal injury and $100,000 for property damage, in the Guaranty Agreement taxpayer
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