Don C. Reser and Rebecca Jo Reser - Page 11

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               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                 




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