- 15 -
substance of the transactions to be a shareholder’s guaranty of
the indebtedness of an S corporation.
Petitioner argues that there was bona fide indebtedness
between himself and American, and that his relending of the funds
to Schanno by way of purchasing a participation interest entitles
him to adjusted basis. Petitioner relies on Raynor v.
Commissioner, 50 T.C. 762 (1968), for the proposition that when a
shareholder borrows funds from a third party and lends those
funds to his or her S corporation, he is entitled to basis.
Petitioner’s reliance is misplaced, and the fact that there was
bona fide indebtedness between American and petitioner is not
significant because petitioner did not relend the funds directly
to Schanno. The statutory language makes clear the shareholder
will get basis only in “indebtedness of the S corporation to the
shareholder”. Sec. 1366(d)(1)(B) (emphasis added). This
requires a direct obligation between the shareholder and the S
corporation. See Hitchins v. Commissioner, supra. Such is not
the case here.
The participation agreement makes clear that petitioner did
not become a lender to or creditor of Schanno. There was no note
or other contract between petitioner and Schanno, and petitioner
was not a party to the Schanno note or the credit note. American
had sole discretion to enforce all rights under the notes,
without the advice or consent of petitioner. Petitioner’s
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