Bill L. and Patricia M. Spencer - Page 36

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          liability may exist, but not debt to the shareholder.  Raynor v.            
          Commissioner, supra at 771.  This Court also has held that the              
          mere guaranty of a loan does not involve any economic outlay.               
          Estate of Leavitt v. Commissioner, supra at 422; Brown v.                   
          Commissioner, supra.  Until the guarantor pays the obligation,              
          the guarantor does not have an actual investment.  Brown v.                 
          Commissioner, supra; Underwood v. Commissioner, 63 T.C. 468, 476            
          (1975), affd. 535 F.2d 309 (5th Cir. 1976).                                 
               Nonetheless, in Selfe v. United States, 778 F.2d 769, 773              
          (11th Cir. 1985), the Court of Appeals for the Eleventh Circuit28           
          concluded that a shareholder has basis in guaranteed loans for              
          purposes of section 1366(d)(1) where the facts demonstrate that,            
          in substance, the shareholder borrowed the funds and subsequently           
          advanced them to the S corporation.  In Selfe, the court reasoned           
          that the shareholder-guaranteed loan may be treated for tax                 
          purposes as an equity investment in the corporation where the               
          lender looks to the shareholder as the primary obligor.  Id. at             
          774.  Thus, pursuant to Selfe, shareholder guaranteed loans may             
          give rise to basis in the shareholder's stock as an equity                  
          investment within the meaning of section 1366(d)(1)(A).  The                
          taxpayer in Selfe entered the retail clothing business.  Prior to           


          28   Absent stipulation to the contrary, the instant case is                
          appealable to the Court of Appeals for the Eleventh Circuit.  See           
          Golsen v. Commissioner, 54 T.C. 742, 757 (1970), affd. 445 F.2d             
          985 (10th Cir. 1971).                                                       




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