Bill L. and Patricia M. Spencer - Page 37

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          incorporation of that business, the taxpayer pledged stock in a             
          family-owned corporation, Avondale Mills, in exchange for a line            
          of credit to be used in the business.  Subsequently, the clothing           
          business was incorporated as Jane Simon, Inc.  At the request of            
          the bank, all loans made to the taxpayer individually, with the             
          exception of $10,000, were converted to corporate loans (to Jane            
          Simon, Inc.).  The taxpayer guaranteed all such indebtedness to             
          the bank.  At trial, the loan officer employed by the bank                  
          testified that the bank wanted the assurance of having the                  
          corporation primarily liable for repayment of the loan, but that            
          the conversion did not abridge the stock pledged as collateral,             
          or the bank's rights against the taxpayer as guarantor, in the              
          event of the corporation's default.  Subsequently, the                      
          corporation (Jane Simon, Inc.) granted the bank a security                  
          interest in its receivables, inventory, and contract rights in              
          order to obtain renewal of its loans.                                       
               Relying on Selfe v. United States, supra, petitioners argue            
          that the bank loan was, in substance, a loan to Messrs. Spencer             
          and Boozer and a subsequent capital contribution of such loan               
          proceeds to SPC-SC.                                                         
               There are, however, fundamental differences between the                
          instant case and Selfe.  The corporate indebtedness in Selfe was            
          preceded by a loan to the shareholder in her individual capacity.           
          That loan was subsequently converted to a corporate loan, upon              





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