Thomas F. and Therese Grojean - Page 17

                                        - 17 -                                         
               A:  Yes.                                                                
               Q:  Okay.  And--I didn’t mean to interrupt.  Go ahead.                  
               A:  Yes.  In addition, it is the lead bank who is                       
               enforcing the obligation in a participation agreement--                 
               Q:  And is that because the participant has no rights                   
               to enforce that obligation?                                             
               A: Yes.                                                                 
               Petitioner’s reliance on Gilday v. Commissioner, T.C. Memo.             
          1982-242, is also misplaced.  In Gilday, the bank held the note              
          of an S corporation.  The taxpayer and other shareholders of the             
          S corporation issued their note to the bank, and the bank                    
          canceled the S corporation’s note.  In exchange, the S                       
          corporation gave its note, in the same amount, to the                        
          shareholders.  The result was that the shareholders became the               
          sole obligors to the bank, and the S corporation was directly                
          indebted to the shareholders.  We held the shareholders had a                
          basis in the debt for purposes of former section 1374(c), the                
          predecessor of section 1366(d).3  That was not the case here.                
          Schanno was not directly indebted to petitioner in any way, and              
          petitioner’s rights were against American, not Schanno.  Because             
          the notes from the corporation to the bank were the mirror image             

               3We recognize that in Gilday v. Commissioner, T.C. Memo.                
          1982-242, the shareholders of the S corporation did not make                 
          an actual outlay of funds.  However, our holding in Gilday is                
          that the substitution of the shareholders as the sole                        
          unconditional obligors to the bank and of the S corporation as               
          the sole unconditional debtor to the shareholders constituted a              
          constructive furnishing by the shareholders of the funds                     
          previously loaned by the third party bank.  See also Hitchins v.             
          Commissioner, 103 T.C. 711 (1994).                                           

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