- 12 -
Commissioner, 59 T.C. 172 (1972).
To make an economic outlay, the shareholder must be left
poorer in a material sense after the transaction has been fully
consummated. See Perry v. Commissioner, 54 T.C. 1293, 1296
(1970), affd. per order (8th Cir., May 12, 1971). A shareholder
does not acquire basis by acting as guarantor, surety, or
accommodation party with respect to his corporation’s borrowing
from a third party until the shareholder pays part or all of the
obligation. See Brown v. Commissioner, 706 F.2d 755, 757 (6th
Cir. 1983), affg. T.C. Memo 1981-608; Estate of Leavitt v.
Commissioner, 90 T.C. 206, 211 (1988), affd. 875 F.2d 420 (4th
Cir. 1989); Underwood v. Commissioner, 63 T.C. at 468-469; Raynor
v. Commissioner, 50 T.C. 762, 770-771 (1968); Perry v.
Commissioner, 47 T.C. 159 (1966), affd. 392 F.2d 458 (8th Cir.
1968).
Here, the interrelated transactions show petitioner was in
substance a guarantor of the indebtedness between Schanno and
American. The effect of all the transactions was that petitioner
would not be out-of-pocket unless and until Schanno failed to
make payments under the Schanno note or the credit note. The
substance of a transaction will control over its form. See
Gregory v. Helvering, 293 U.S. 465, 469-470 (1935); Spencer v.
Commissioner, 110 T.C. 62 (1998).
Petitioner acquired the $1.2 million to purchase the
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Next
Last modified: May 25, 2011