Thomas F. and Therese Grojean - Page 14

                                        - 14 -                                         
          economic outlay--unless Schanno defaulted.  This conclusion is               
          consistent with the treatment of the participations in Schanno’s             
          certified financial statements.  Those statements, which were                
          certified as correct by the independent accounting firm and which            
          were reviewed by petitioner, disclosed the participations as a               
          guaranty by petitioner of the debt between American and Schanno.             
               In Underwood v. Commissioner, supra, we held that the                   
          taxpayer’s series of interrelated transactions was tantamount to             
          a disguised guaranty of an S corporation’s indebtedness to a                 
          third party.  In that case, the taxpayers were the sole                      
          shareholders of two corporations engaged in the retail barbecue              
          business, one a profitable C corporation (C-corp), the other an              
          unprofitable S corporation (S-corp).  The C-corp made loans to               
          the S-corp over nearly a 2-year period.  The S-corp gave the C-              
          corp promissory notes for the loans.  In an attempt to acquire               
          additional S-corp basis, the taxpayers rearranged the notes in               
          three steps:  (1) The C-corp surrendered the notes of the S-corp;            
          (2) one of the taxpayers gave a personal note to the C-corp; and             
          (3) the S-corp gave its note to that taxpayer.  We held that the             
          taxpayer did not make the requisite economic outlay and that the             
          substance of the arrangement was similar to a guaranty of the                
          indebtedness.  See Underwood v. Commissioner, supra at 475; see              
          also Estate of Leavitt v. Commissioner, 90 T.C. 206 (1988), affd.            
          875 F.2d 420 (4th Cir. 1989).  Likewise here, we find 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