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neither Mr. Salem nor Mrs. Saxon pledged any personal assets to
secure SS&N's debt to the bank.
SS&N was a C corporation from 1981 through September of
1989. On December 15, 1989, SS&N elected to be an S corporation
effective as of October 1, 1989.
The accounting firm of Laventhol & Horwath (L&H) prepared
the corporate income tax return for SS&N for the taxable year
ending December 31, 1989. Eileen Sharkey of L&H sent the
following letter dated September 6, 1990, to Mr. Salem:
Dear Richard:
In preparing the corporate income tax return for
the period ended December 31, 1989 for Salem, Saxon and
Nielsen, P.A., we have discussed various issues with
Bernice. This letter covers one particular tax item of
significance, principally to you.
On December 31, 1989, the professional association
had loans outstanding of approximately $710,000 payable
to the Bank of Tampa. It is our understanding that the
loans were made to Salem, Saxon and Nielsen, P.A., with
your personal guarantee. The issue is the Internal
Revenue Service's lack of recognition of a guarantee as
part of tax basis as further discussed below. As you
know, the professional association has incurred a loss
of $43,330 for the year ended December 31, 1989. Your
share of the loss is approximately $37,000 and
represents a tax benefit on your individual return of
approximately $12,000. By taking a tax position
contrary to the Internal Revenue Service, your return
is subject to controversy.
Subchapter S Corporation losses that pass through
to the shareholders are fully deductible only to the
extent that the shareholders have basis in the S
Corporation stock, plus basis in their loans to the S
Corporation (Internal Revenue Section 1366(d)(1)).
Applying this provision to Salem, Saxon & Nielsen,
P.A., your current basis would be de minimis, and your
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