9
deductions based on the determination that petitioner had no
basis in DRPC to support them. The central issue in this case is
whether petitioner's basis in DRPC should be increased to reflect
amounts lent from Frost Bank or from petitioner to DRPC.
In order for petitioner to obtain basis from such loans, it
must be proven that petitioner has made an economic outlay of
some kind. Harris v. United States, 902 F.2d 439, 443 (5th Cir.
1990); Estate of Leavitt v. Commissioner, 875 F.2d 420, 423 (4th
Cir. 1989), affg. 90 T.C. 206 (1988); Underwood v. Commissioner,
63 T.C. 468, 476 (1975), affd. 535 F.2d 309 (5th Cir. 1976). A
mere guaranty will not constitute the required economic outlay
until such time that the shareholder is actually called upon to
pay all or part of the obligation. Estate of Leavitt v.
Commissioner, supra at 423.
In Harris v. United States, supra, the taxpayers formed
Harmar, an S corporation, which was initially capitalized by its
two shareholders with $1,000 and a loan for $475,000. Harmar
received a $700,000 loan from Hibernia National Bank to purchase
a movie theater. To secure the loan with Hibernia, Harmar
executed two notes in the amount of $350,000. One was secured by
assets of the first shareholder, while the second was secured by
a mortgage on the theater. The mortgage also secured any other
debt of Harmar to Hibernia. Each shareholder also executed
3(...continued)
adjustment under paragraph (2) of section 1367(b)
for the taxable year).
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