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Commissioner, supra, although not invariably, see Yates v.
Commissioner, T.C. Memo. 2001-280; Culnen v. Commissioner, T.C.
Memo. 2000-139, revd. on another ground 28 Fed. Appx. 116 (3d Cir.
2002). Thus, the presence of a third-party lender as a source of
the funds lent by the shareholder to his S corporation has been an
important factor in determining whether the shareholder made an
actual economic outlay. The certainty that an unrelated, arm's-
length lender will enforce repayment from the shareholder supports
the conclusion that the shareholder has made an economic outlay in
connection with lending funds to his S corporation. See Oren v.
Commissioner, supra; Bergman v. United States, supra.
The same result as a "back to back" loan is reached where a
shareholder substitutes his own note for the note of his S
corporation on which he was a guarantor, thereby becoming the sole
obligor on the new indebtedness. Gilday v. Commissioner, T.C.
Memo. 1982-242; see also Rev. Rul. 75-144, 1975-1 C.B. 277.17 In
such "note substitution" scenarios, so long as the S corporation's
17 Rev. Rul. 75-144, 1975-1 C.B. 277, held that basis is
generated on the shareholder’s substitution of his note for the S
corporation's note if the corporation becomes indebted to the
shareholder under State law subrogation rules. In Gilday v.
Commissioner, T.C. Memo. 1982-242, however, we dispensed with the
subrogation requirement and held that where a shareholder
substituted his own note for the S corporation’s and the
corporation’s debt was extinguished, the corporation became
indebted to the shareholder, regardless of the effect of State
law subrogation rules, and thus the shareholder was entitled to
basis in the substituted note under the predecessor of sec.
1366(d)(1)(B).
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