11
In Estate of Leavitt v. Commissioner, supra, the Court of
Appeals for the Fourth Circuit, affirming the Tax Court, refused
to find that the taxpayers had bases in loans from a bank to an S
corporation where the taxpayers had personally guaranteed those
loans. At the time of the loan, the corporation's liabilities
exceeded its assets, it had virtually no cash flow, and it
offered no assets as collateral. The bank would not have made
the loan without the shareholder guaranties. The corporation's
returns and financial statements reflected that the loan was from
the shareholders. The court focused on how the parties actually
treated the loan, not on how they nominally reported it on their
returns and financial statements. The corporation paid the
principal and interest to the bank, and neither the corporation
nor the shareholders treated the corporate payments on the loan
as corporate payments to the shareholders. The taxpayers argued
that the loan was in substance a loan to them and then a
subsequent loan to the corporation.
The court found the taxpayers' position inconsistent with
the true form of the transaction and concluded that there had
been no economic outlay, as the shareholders had not been called
upon to make payment on the guaranty.
We must decide here whether there was a legitimate debt
between petitioner and DRPC. With regard to the bank notes, DRPC
paid some of the principal payments and guaranty fees. Without
the guaranty of Don Test, Frost Bank would not have made the
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Next
Last modified: May 25, 2011