Thomas F. and Therese Grojean - Page 10

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          claimed losses.  Respondent disallowed the losses in full and                
          made other computational adjustments resulting from this                     
               Petitioners’ 1989 and 1990 Federal income tax returns were              
          due, with extensions, on October 15, 1990, and August 15, 1991,              
          respectively.  Petitioners filed those returns on December 13,               
          1990, and September 5, 1991, respectively.                                   
               We decide whether petitioner may increase his basis in                  
          Schanno under section 1366(d) by the $1.2 million purchase price             
          of his participation interests in the Schanno note and the                   
          Schanno credit note.  Respondent argues that petitioner received             
          no basis on account of his participation interests because the               
          Grojean note and the Grojean credit note were disguised                      
          guaranties, and petitioner did not make the requisite economic               
          outlay.  Alternatively, respondent argues that the Grojean note              
          and the credit note were an integral part of interrelated                    
          transactions having no independent economic substance.   We agree            
          with respondent that petitioner functioned as if he were a                   
          guarantor of Schanno’s indebtedness to American, and petitioner              
          is not entitled to a basis increase for the guaranty.                        
               Section 1366(a) requires a taxpayer to take into account the            
          pro rata share of income, losses, and deductions of an S                     
          corporation of which the taxpayer is a shareholder.  The losses              

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