10
personal guaranties of Harmar's debt. The Commissioner
disallowed a loss claimed by the shareholders as it exceeded
their bases. The taxpayers sought to have the court ignore the
form of the transaction and look to what they claimed was the
substance of the transaction, namely, that the $700,000 loan was
to them and that they subsequently contributed such amounts to
Harmar's account. This allegation was supported by a bank
officer's testimony that the bank looked primarily to the
shareholders for repayment.
Harmar received the interest notices, paid all principal
payments, and deducted those interest payments on its income tax
returns. Harmar's books and records reflected that the loan was
not made by Hibernia until 1986, 4 years after the year in
question, when it was reflected as being made by the taxpayers.
Harmar's 1982 return showed no loan repayments to the
shareholders, which it would have done if the loan had been one
from the taxpayers to Harmar. The loan made by Hibernia was
earmarked by Hibernia for a specific use by Harmar. Finally, the
return indicated a $2,000 capital investment and a $68,000 loan
from the taxpayers, which fell far short of the claimed $700,000
loan. The court concluded that the return was wholly
inconsistent with the position of the taxpayers and, refusing to
recast the bank loan to Harmar as being substantively from the
bank to the shareholders to Harmar, found that no economic outlay
had been made.
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