- 36 -
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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