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corporations for repayment. Respondent cites three particular
factual circumstances in support of this stance. First, the loan
stipulated that the funds could only be utilized to obtain the
shares of Alofs and Target. Second, the Alofs and Target stock
was used to collateralize the loan; petitioners pledged no
personal assets. Third, payments on the loans were made by Alofs
and Target, and those payments were not treated as constructive
dividends to petitioners. Respondent contends that these facts
render the case at bar analogous to Hafiz v. Commissioner, T.C.
Memo. 1998-104.
In Hafiz v. Commissioner, supra, a partnership owned a
motel. One of the partners, the taxpayer-husband, decided to
purchase the motel and organized an S corporation to make the
acquisition. Id. A bank agreed to lend funds for the purchase.
The S corporation, the taxpayers, and the taxpayer-husband’s
medical practice were named as obligors of the loan, and the
proceeds thereof were required to be used to buy the motel. Id.
The loan was secured by the motel, and the taxpayer-husband was
required to pledge personal assets as additional security. Id.
Although the S corporation gave the taxpayer-husband a promissory
note for the amount of the loan, the corporation treated the loan
on its books as from the bank, made the payments due to the bank,
and deducted the interest remitted. Id. Neither the corporation
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