Thomas F. and Therese Grojean - Page 1

                                 T.C. Memo. 1999-425                                   

                               UNITED STATES TAX COURT                                 

                    THOMAS F. AND THERESE GROJEAN, Petitioners v.                      
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                       

               Docket No. 14374-98.                Filed December 29, 1999.            

                    P organized A to acquire 100 percent of the stock                  
               of S.  To finance the purchase, A and S borrowed $13.2                  
               million from the bank, and A and S signed a promissory                  
               note in favor of the bank (the note).  P was not a                      
               party to the note.  P contemporaneously borrowed $1.2                   
               million from the bank and signed a note in favor of the                 
               bank (P note), and P used the funds to purchase a $1.2-                 
               million participation interest in the note.  The note                   
               and the P note had identical terms, and the bank                        
               automatically credited amounts due under the P note                     
               with amounts due P for his participation interest.  No                  
               cash changed hands, and all funds were electronically                   
               credited at the bank.  In calculating his allowable                     
               distributive share of S losses for 1989, 1990, and                      
               1991, P included in his basis $1.2 million for his                      
               participation share.  Held: In substance P functioned                   
               as a guarantor of $1.2 million of the note, and P is                    
               not entitled to include in his S basis the $1.2 million                 
               participation interest.  P did not make the requisite                   

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