Richard J. Salem and Eileen L. Salem - Page 6

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               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.                                              




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