William H. Maloof - Page 9

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          the guaranty to increase basis in the S corporation.8  Perry v.             
          Commissioner, 392 F.2d 458 (8th Cir. 1968) (corporate debts                 
          guaranteed by the shareholder were not debt whose basis is taken            
          into account for loss passthrough purposes).  But see Selfe v.              
          United States, supra (sole shareholder may get a basis increase             
          in stock if the loan was in fact made to him or her and borrowed            
          funds were re-lent to corporation).  Cf. Estate of Leavitt v.               
          Commissioner, 90 T.C. 206 (1988) (no basis increase for                     
          shareholder-guaranteed loan to corporation; majority refused to             
          apply debt-equity principles to S corporation’s guaranteed loan,            
          rejecting Selfe).                                                           
               The shareholder in an S corporation therefore, generally,              
          may not increase his or her basis in the S corporation by simply            
          guaranteeing the debt of an S corporation.  Because petitioner              
          was not called upon to perform under the loan or make any                   
          payment, we hold that his personal guaranty did not increase his            
          basis in Level Propane.                                                     
          Pledged Collateral                                                          
               We next address whether petitioner’s pledge of stock of an S           
          corporation to secure the loan the bank made to the S corporation           
          constitutes an economic outlay.  We address, first, our caselaw,            

               8By contrast, a limited partner who guarantees a nonrecourse           
          partnership debt may be allowed to increase basis.                          

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