- 28 -
nor the taxpayers reported the loan payments as constructive
dividends. Id. A second loan was structured similarly. Id.
The taxpayers in Hafiz v. Commissioner, supra, argued that
the loans should be viewed as loans to them, followed by loans
from them to the S corporation. As such, they could increase
their bases and deduct losses incurred by the corporation. Id.
This Court rejected the taxpayers’ plea to ignore the form of the
loans and rely on the asserted economic substance, holding that
the transactions were in form and substance loans from the bank
to the corporation. Id.
While certain of the facts present in Hafiz v. Commissioner,
supra, have parallels here, there remains a critical difficulty
with drawing an analogy from that case, or indeed from much of
the body of caselaw addressing S corporation shareholders and
loans. The majority of this jurisprudence involves situations
where the corporation was a (often the only) primary obligor on
the loan at the time the funds were disbursed. E.g., Sleiman v.
Commissioner, supra at 1354-1355; Bergman v. United States, 174
F.3d at 929; Estate of Leavitt v. Commissioner, 875 F.2d at 421-
422; Brown v. Commissioner, 706 F.2d at 756; Underwood v.
Commissioner, 535 F.2d 309, 310-311 (5th Cir. 1976), affg. 63
T.C. 468 (1975); Spencer v. Commissioner, 110 T.C. at 66-67. The
shareholders were accordingly attempting to overcome the initial
documentary record with a later restructuring and/or with
Page: Previous 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 NextLast modified: May 25, 2011