- 23 -
through entity which advanced the funds and is closely related to
the taxpayer does not increase the shareholder's adjusted basis
in stock. Hitchins v. Commissioner, supra; Frankel v.
Commissioner, 61 T.C. 343, 347-348 (1973), affd. 506 F.2d 1051
(3d Cir. 1974) (partnership); Prashker v. Commissioner, 59 T.C.
172 (1972) (estate); Burnstein v. Commissioner, T.C. Memo. 1984-
74 (S corporation); Robertson v. United States, 32 AFTR 2d 73-
5556, 73-2 USTC par. 9645 (D. Nev. 1973) (trust).7
1. Guarantee of the HMC Loan
On August 21, 1984, WRI obtained a $2.5 million construction
loan from HMC. It was secured by a mortgage on the land WRI
bought from Hersco plus any improvements made on the land. Wise
and Eicher each personally guaranteed the HMC loan. Petitioners
contend that Wise and Eicher can each increase their basis in WRI
by $1.25 million as a result of their personal guarantees.
Respondent contends that Wise and Eicher may not increase their
basis in WRI as a result of their personal guarantees because
they did not make an economic outlay. We agree with respondent.
A shareholder's guarantee of a debt of an S corporation,
without an economic outlay, does not make the corporation
7Most of the cases interpreting "indebtedness of the S
corporation to the shareholder" apply former section 1374(c)(2).
That section was repealed by the Subchapter S Revision Act of
1982, Pub. L. 97-354, sec. 2, 96 Stat. 1669, 1677-1683 effective
for taxable years beginning after December 31, 1982. There are
no differences between former section 1374(c)(2) and the current
section 1366(d)(1)(B), that affect this analysis.
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