- 17 -
Right?
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