- 6 -
deductible loss on your individual income tax return
for 1989 would also be de minimis. Of course, the
remaining loss would be available for the carryforward
to future years. With your concurrence, we will take
the tax return position that the loan guarantee
provides you basis to take the losses. In order to
avoid penalties in the event the Internal Revenue
Service should prevail upon challenge, the rules
require the tax return to be based on "substantial
authority," as defined. We believe Selfe v. United
States, * * * 778 F.2d 769 (11th Cir. 1985) provides
such authority. In this case, the court applied a
debt-equity analysis and held that a shareholder's
guarantee of a loan made to a Subchapter S Corporation
may be treated for tax purposes as an equity investment
in the corporation where the lender looks to the
shareholder as the primary obligor. However, this case
is unique to the 11th Circuit and does not have the
Commissioner's acquiescence. Therefore, upon
examination, a controversy may arise.
The safest course of action and the one we
recommend is to restructure the loans so that you are a
co-maker rather than a guarantor. In this way, you can
clearly demonstrate that you have basis in the losses
which flow through on your individual income tax return
and take full advantage of the concomitant tax
benefits.
In September and October of 1990, Mr. Salem and Mrs. Saxon
executed the following new notes (replacement notes) that, except
for No. 14, replaced the existing notes representing SS&N's debt
to the bank:
No. Date Amount
13 9/30/90 1$275,000
14 9/30/90 25,000
15 9/30/90 2300,000
16 10/18/90 366,112
17 10/18/90 4757,805
1 Renewal of loan No. 11.
2 Consolidation and renewal of loans No. 13 & No. 14.
3 Renewal of loan No. 12.
4 Renewal of loan No. 10.
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