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Petitioners herein contend that they are entitled to
increase their tax bases in the Corporation's indebtedness to the
Bank of Amity, to the extent they personally guaranteed and
secured such indebtedness. Petitioners rely heavily on Selfe v.
United States, supra. In that case, a bank made a loan to a
taxpayer individually, and the taxpayer secured the loan by a
pledge to the bank of shares of stock in a corporation. When the
taxpayer later incorporated a business, the above loan was
converted into a loan to the new corporation, accompanied by the
taxpayer's guaranty of the corporation's repayment of the loan to
the bank.
The Court of Appeals for the Eleventh Circuit held that,
although shareholder guaranties of subchapter S corporate
indebtedness generally will not increase the shareholder’s tax
basis in the corporation, a narrow exception may exist “where the
facts demonstrate that, in substance, the shareholder has
borrowed funds and subsequently advanced them to * * * [the]
corporation.” Id. Because material facts remained in dispute,
in Selfe, the Court of Appeals remanded the case to the trial
court to evaluate whether the loan from the bank should be
treated in reality as a loan to the taxpayer and then to the
S corporation.
By contrast, in the instant cases, the Bank of Amity
extended funds directly to the Corporation, and the Corporation
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