In the

United States Court of Appeals

For the Seventh Circuit

No. 00-2252

Thomas F. Grojean and Therese Grojean,

Petitioners-Appellants,

v.

Commissioner of Internal Revenue,

Respondents-Appellees.

Appeal from the United States Tax Court.

No. 14374-98--David Laro, Judge.

Argued December 1, 2000--Decided April 13, 2001

 Before Posner, Diane P. Wood, and Williams, Circuit

Judges.

 Posner, Circuit Judge. The question presented by

this appeal from a decision by the Tax Court is

whether that court committed a clear error in

characterizing Thomas Grojean’s participation

interest in a loan made by American National Bank

to Grojean’s Subchapter S corporation, Schanno

Acquisition, Inc., as a guaranty.

 Grojean had formed Schanno Acquisition in order

to buy a trucking company from Transamerica

Leasing Corporation. The price was a shade under

$14 million. To finance the purchase, Grojean

turned to American National Bank. He asked to

borrow $11 million from the bank, which was

willing but insisted that he personally guarantee

the loan. He refused, but continued negotiating

with the bank, and eventually they worked out a

deal by which the bank would make two loans to

Schanno, aggregating $10 million, plus a $1.2

million loan to Grojean conditioned on his

purchasing a $1.2 million participation in one of

the bank’s loans to Schanno, a loan for $8.4

million. The participation agreement subordinated

Grojean’s interest in that loan to the bank’s.

The interest rate was the same on both the $8.4

million bank loan to Schanno in which Grojean

participated and the $1.2 million bank loan to

Grojean, and it was agreed that he would receive

no payments on his participation interest until

the bank was repaid its share of the $8.4 million
loan. Thus, if Schanno repaid the $8.4 million

loan in accordance with its terms Grojean would

neither be out of pocket any cash nor receive any

cash--his participation interest in that loan,

and the bank’s loan to him, would cancel each

other out--while if Schanno defaulted, Grojean

would have to make good on the bank’s loss up to

$1.2 million, the amount the bank had lent him.

 Although Schanno did not default, it did lose

money, and Grojean wanted to deduct those losses

on his federal income tax return, since the gains

and losses of Subchapter S corporations pass

through to the shareholders. But he could do this

only to the extent of his investment in Schanno,

consisting of the adjusted basis of his stock

plus any indebtedness of the corporation to him.

26 U.S.C. sec. 1366(d)(1). He treated his

participation interest in the bank’s $8.4 million

loan to Schanno as a $1.2 million indebtedness of

Schanno to him and it is this move that the Tax

Court rejected. It did so on the alternative

grounds that (1) the participation interest was

really a guaranty, not a loan, and (2) if a loan

it was a loan to American National, not to

Schanno. The parties agree that a guaranty is not

an investment for purposes of section 1366(d)(1).

 A lender like a guarantor assumes a risk of

default and by doing so reduces the risk borne by

any creditor to whose interest the loan is

subordinated. From American National’s standpoint

it was irrelevant whether Grojean guaranteed $1.2

million of the bank’s loan to Schanno or took a

subordinated $1.2 million participation interest

in that loan. Lenders differ from guarantors,

however, in doing more than assuming risk: they

procure funds for the use of the borrower (often

just to replace a previous loan, but that of

course is a use by the borrower of the newly

borrowed funds). Grojean did not procure $1.2

million for the use of Schanno, as he would have

done had he gone to a bank or other lender,

borrowed $1.2 million from it, and written a

check for that amount to Schanno. Instead the

$1.2 million that Grojean "lent" Schanno was a

slice of the $8.4 million loan that the bank made

to Schanno. The only significance of Grojean’s

"loan," since it involved no transfer of money

from him to Schanno or any other entity, was that

it operated to guarantee that amount of American

National’s loan. Functionally, it was not a loan

or loan participation at all, but a guaranty, and

so the Tax Court committed no error, clear or

otherwise, in reclassifying it as a guaranty.

Otherwise a taxpayer could, by the kind of

restructuring engineered here, obtain for a

guaranty a tax advantage intended for a loan or

other indebtedness.
 The difference between a loan and a guaranty may

seem a fine one, since, when the amount is the

same, the lender and guarantor assume the same

risk (subject to a possible wrinkle, concerning

bankruptcy, discussed later). The difference

between the two transactional forms may seem to

amount only to this: the loan supplies funds to

the borrower, and the guaranty enables funds to

be supplied to the borrower. That is indeed the

main difference, but it is not trivial or nominal

("formal"). As explained in Avery Katz, "An

Economic Analysis of the Guaranty Contract," 66

U. Chi. L. Rev. 47, 113-14 (1999), the threecornered arrangement (borrower, lender,

guarantor) created by a guaranty makes economic

sense only if the lender has a comparative

advantage in liquidity (that is, in being able to

come up with the money to lend the borrower) and

the guarantor a comparative advantage in bearing

risk. Otherwise the additional transaction costs

of the more complex arrangement would be

uneconomical.

 At a high enough level of abstraction, it is

true, the difference between providing and

enabling the provision of funding may disappear.

Indeed, at that level, the difference between

equity and debt, as methods of corporate

financing, disappears. See Franco Modigliani &

Merton H. Miller, "The Cost of Capital,

Corporation Finance and the Theory of

Investment," 48 Am. Econ. Rev. 361 (1958). But at

the operational level, because of various

frictions that some economic models disregard,

such as transaction and liquidity costs, there

really is a substantive and not merely a formal

difference between lending and guaranteeing. In

contrast, the difference between a guaranty and

the form that Grojean’s loan participation

assumed was nothing but the label. It was a

purely formal difference, and in federal taxation

substance prevails over form. Gregory v.

Helvering, 293 U.S. 465 (1935); Williams v.

Commissioner, 1 F.3d 502, 505 (7th Cir. 1993);

Yosha v. Commissioner, 861 F.2d 494, 498-99 (7th

Cir. 1988); Boris I. Bittker & James S. Eustice,

Federal Income Taxation of Corporations and

Shareholders sec. 1.05[2][b] (7th ed. 2000).

 If a transaction has "economic substance which

is compelled or encouraged by business or

regulatory realities, is imbued with taxindependent considerations, and is not shaped

solely by tax-avoidance features that have

meaningless labels attached, the Government

should honor the allocation of rights and duties

effectuated by the parties." Frank Lyon Co. v.

United States, 435 U.S. 561, 583-84 (1978).

"Business realities" cast Grojean in the role of

guarantor rather than lender; no business
realities compelled him to recharacterize his

guaranty as a loan participation. The Internal

Revenue Service was therefore entitled to

recharacterize the participation as a guaranty,

in much the same way that it is entitled to

recharacterize a shareholder’s loan to his

corporation as an equity investment if the "loan"

label has no economic significance. Bittker &

Eustice, supra, sec. 1.05[2][b], p. 1-20. (In

some cases, tax considerations will point the

taxpayer the other way, toward recharacterizing a

loan as a guaranty. See Katz, supra, at 89.)

 We pressed Grojean’s counsel at argument to

explain what functional--substantive--practical--

difference there was between a guaranty by

Grojean of $1.2 million of American National’s

$8.4 million loan to Schanno and Grojean’s $1.2

million participation interest in that loan. He

gave two answers. The first was that the

participation interest must have been worth more

to American National than a guaranty of the same

amount would have been (and so these could not be

the same animals however much they resemble each

other), because the bank allowed Grojean to

substitute a $1.2 million participation interest

for an $11 million guaranty. Several points are

ignored. The bank’s request for that guaranty was

just the opening bid in a negotiation, and there

is nothing in the record to indicate whether the

bank would have held out for such a guaranty,

which Grojean plainly was unwilling to give the

bank, to the end of the negotiation. The terms of

the ultimate deal between Schanno and American

National may have been more favorable to American

National in other dimensions besides guaranties,

such as interest rates and security, than the

deal first discussed, another issue on which the

record is silent. And Grojean has been unable to

explain on what possible basis a $1.2 million

participation could be worth more to the bank

than an $11 million guaranty by the same person.

 The second answer that Grojean’s counsel gave to

our question was that the participation mode

would be more advantageous to Grojean if Schanno

was forced into bankruptcy during the six-year

term of the bank’s loan to it. Had Grojean

guaranteed $1.2 million of that loan and Schanno

defaulted, Grojean after paying off the bank to

the limit of the guaranty would under normal

principles of suretyship have had a $1.2 million

claim for reimbursement from Schanno. But if

Schanno paid Grojean any part of such a claim,

the payment would be a preference to an insider

creditor (because Grojean owns Schanno), so that

if Schanno declared bankruptcy within a year of

the payment Grojean would have to return it to

the debtor (or the trustee in bankruptcy, if one

was appointed) and take his place in line with
the other creditors. 11 U.S. sec. 547 (b)(4)(B);

Lawyers Title Ins. Corp. v. Dearborn Title Corp.,

118 F.3d 1157, 1160 (7th Cir. 1997); In re

Vitreous Steel Products Co., 911 F.2d 1223, 1238

n. 6 (7th Cir. 1990); Levit v. Ingersoll Rand

Financial Corp., 874 F.2d 1186, 1188 (7th Cir.

1989); In re Dorholt, Inc., 224 F.3d 871, 873-74

(8th Cir. 2000). If instead he had a

participation interest in the bank’s loan, he

would technically not be a creditor of Schanno

(since it was the bank’s loan, not his), and so

the normal 90-day preference period would apply.

Or so Grojean argues--for the bankruptcy court,

just like the Tax Court here, might reclassify

the participation interest as a guaranty, making

the guarantor (Grojean) a creditor of Schanno

once he made good on the guaranty. Cf. Bonded

Financial Services, Inc. v. European American

Bank, 838 F.2d 890, 894-96 (7th Cir. 1988). For

bankruptcy too has a "substance over form"

doctrine. In re Zedda, 103 F.3d 1195, 1203-04

(5th Cir. 1997); Brockington v. Scott, 381 F.2d

792, 794 (4th Cir. 1967).

 We need not consider the applicability of that

doctrine (on which see Douglas G. Baird, The

Elements of Bankruptcy 188-89 (rev ed. 1993)) to

Schanno’s hypothetical bankruptcy. Grojean’s

bankruptcy argument does not identify a

functional difference between an outright

guaranty and the loan participation. It

identifies a merely formal difference that

Grojean hoped a bankruptcy court would not see

through. This is not to deny that the seeking of

a legal advantage can lend substance to the

choice of a transaction form. The choice to do

business in the corporate form is not treated as

an empty formality merely because the motive may

be to obtain (legally) limited liability for the

shareholders. But that formality has itself a

substantive purpose, that of facilitating the

raising of capital by protecting investors from

unlimited personal liability for the venture’s

debts. The advantage in bankruptcy that Grojean

sought by structuring his guaranty as a loan

participation was, in contrast, a pure

smokescreen--an endeavor to conceal his insider

status by having his loan to Schanno laundered by

American National.

 Grojean’s bankruptcy argument shows up the

futility of another argument of his, that

previous cases of successful efforts by the

Internal Revenue Service to get loan

participations reclassified as guaranties

involved affiliated entities. See, e.g., Bergman

v. United States, 174 F.3d 928, 932-33 (8th Cir.

1999); Reser v. Commissioner, 112 F.3d 1258, 1264

(5th Cir. 1997); Wilson v. Commissioner, 1991

T.C. Memo 91,544. If Grojean owned American
National Bank, he would endeavor to structure any

transaction between him and it in a way that

would minimize his tax liability while maximizing

his rights in the event of bankruptcy. But he

would do this whether or not he had any control

over the bank. The bank would not resist. It has

no incentive to protect either the taxing

authorities or the other creditors of Schanno

from a deal that minimizes Grojean’s tax

liability and bankruptcy risks. On the contrary,

to the extent that structuring the deal in this

way would be valuable to Grojean, going along

with it would enable the bank to get better terms

from him.

 Grojean’s invocation of bankruptcy actually

strengthens the Tax Court’s alternative ground

for refusing to classify the $1.2 million loan

participation as an indebtedness of Schanno to

Grojean. The alternative ground, recall, is that

whatever the economic realities, Grojean

technically was not a lender to Schanno; only

American National was. Schanno neither had a loan

agreement with Grojean nor issued him a

promissory note. In a loan participation, the

lead bank or other lead lender is the only

lender; the participants have a contractual

relation only with that bank. See, e.g., First

National Bank v. Continental Illinois National

Bank & Trust Co., 933 F.2d 466, 467 (7th Cir.

1991); In re Pearson Bros. Co., 787 F.2d 1157,

1161-62 (7th Cir. 1986); Carondelet Savings &

Loan Ass’n v. Citizens Savings & Loan Ass’n, 604

F.2d 464 (7th Cir. 1979); Den Norske Bank AS v.

First Nat’l Bank, 75 F.3d 49, 51 n. 2 (1st Cir

1996); Penthouse Int’l, Ltd. v. Dominion Federal

Savings & Loan Ass’n, 855 F.2d 963, 967 (2d Cir.

1988). The bank sells shares of the loan to the

participants, as one might sell shares in a

corporation.

 Grojean cries foul. If the government can ignore

the form of his "guaranty," reclassifying it from

a loan participation to a guaranty on the basis

of its economic substance, why shouldn’t he be

allowed to reclassify his loan participation

interest as a loan by him to Schanno, since there

is (he argues) no functional difference between

the two characterizations? The answer is that the

doctrine of substance over form allows only the

government to recharacterize a transaction in

accordance with its commercial significance.

Commissioner v. Court Holding Co., 324 U.S. 331,

334 (1945); Gregory v. Helvering, supra;

Continental Illinois Corp. v. Commissioner, 998

F.2d 513, 519 (7th Cir. 1993); Yosha v.

Commissioner, supra, 861 F.2d at 497-98; Twenty

Mile Joint Venture, PND, Ltd. v. Commissioner,

200 F.3d 1268, 1277 (10th Cir. 1999). The cases

assume rather than state this, but the assumption
is sound. Bittker & Eustice, supra, sec.

1.05[2][b], p. 1-21. The taxpayer’s position and

the government’s position in relation to the use

of transactional forms are asymmetrical. It is

the taxpayer rather than the government that

chooses the form. He can choose whatever form

seems apt to his purposes, but he is bound by his

choice; he cannot take the benefits of the form

but slough off the costs by asking that the

transaction be recharacterized.

 The Bittker treatise suggests there may be an

exception to the onesidedness of the substance

over form doctrine, citing Bartels v. Birmingham,

332 U.S. 126 (1947). In that case the Supreme

Court allowed a dance hall whose contract with

the members of its dance bands described them as

employees of the hall to prove that really the

dance bands were independent contractors and the

members of the bands were their employees, not

the dance hall’s, and so the dance hall wasn’t

liable to pay social security tax. The Court

treated it as a case in which the IRS had simply

identified the wrong firm as the employer and

hence as the taxpayer. There is no suggestion in

this case that the IRS is picking on the wrong

person.

 Even if a taxpayer could sometimes use the

doctrine of substance over form (as we doubt,

outside the narrow class of cases delimited by

Bartels), he could not use it in a case in which

he was trying both to employ the form to defeat

substance and the substance to defeat the form.

That is what Grojean is trying to do. He is

trying to use substance to defeat form in this

tax case, so far as the Tax Court’s alternative

ground (that a loan participant is not the lender

to the borrower of the loan), but he claims that

he would have been entitled to use form to defeat

substance had Schanno declared bankruptcy.

Remember that the theory by which structuring the

$1.2 million guaranty as a loan participation

would give Grojean an advantage in bankruptcy is

that as a loan participant he would technically

not be a creditor of Schanno and therefore he

would escape the one-year extended preference

period for insider creditors of a bankrupt firm.

He cannot have it both ways: if his technicality

works in bankruptcy, it binds him in tax. If it

fails in bankruptcy, this still leaves the Tax

Court its first ground, that the loan

participation was in reality a guaranty.

Affirmed.