- 31 -
expense on the Miller/Huntington Loan, presumably resulting in a
wash.23 On its 1992, 1993, and 1994 returns, MMS consistently
reported the outstanding yearend balance of the restructured
financing as loans from shareholders.
Respondent also relies on Grojean v. Commissioner, T.C. Memo.
1999-425, affd. 248 F.3d 572 (7th Cir. 2001), to support his
position that petitioner, after the loan restructuring, was in
substance merely an accommodation surety or guarantor of a loan
made by Huntington to MMS. In Grojean v. Commissioner, supra, the
taxpayer acquired a participation interest in a third-party bank's
loan to his S corporation, using funds lent to him by the bank for
this purpose. We rejected the taxpayer's claim that his
participation interest in the loan resulted in indebtedness of his
S corporation to him for purposes of section 1366(d)(1)(B). We
held instead that, under the principle of Gregory v. Helvering,
293 U.S. 465, 469-470 (1935), that a transaction's substance
controls over its form, the arrangement was in substance a mere
guaranty by the taxpayer of the indebtedness, which did not give
rise to basis.
23 As part of his adjustments in the notice of deficiency,
respondent eliminated the $109,674 of interest reported as income
by petitioners for 1994 but appears to suggest on brief that
petitioners must recognize this income. We disagree, because it
would appear that petitioners' interest income from the
MMS/Miller Loan is offset by their interest expense on the
Miller/Huntington Loan. We expect the parties to resolve any
discrepancies in accounting for interest expense in their Rule
155 computations.
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