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In pertinent part, section 1011 provides that the adjusted
basis of property shall be the basis of such property determined
under section 1012.
In pertinent part, section 1012 provides that the basis of
property shall be the cost of such property.
III. Arguments of the Parties
Petitioners argue: “The application of traditional debt-
equity principles results in the characterization of Petitioner-
husband’s loan guarantees as a capital contribution to his
Corporation.” Petitioners rely, in particular, on two cases:
Plantation Patterns, Inc. v. Commissioner, 462 F.2d 712 (5th Cir.
1972), and Selfe v. United States, 778 F.2d 769 (11th Cir. 1985).
In Plantation Patterns, the Court of Appeals for the Fifth
Circuit determined that, because of the meager capital position
of the nominal borrower corporation (a C corporation), lenders to
that corporation were relying on the indirect shareholder’s
guaranty of the corporate debt to give borrowing power to the
corporation. See Plantation Patterns, Inc. v. Commissioner,
supra at 722–723. Since the nominal borrower corporation lacked
borrowing power, the Court of Appeals determined that the
indirect shareholder was the real borrower, with the guaranty
simply amounting to a covert way for him to put his money “at the
risk of the business”. Id.
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