The tax court has once again held up that a guarantee by an S corporation shareholder on a loan does not create basis according to TC Summary Opinion 2017-9.
In a recent case, a shareholder admitted that he did not have stock or debt basis, but his argument was that taking the debt on as the sole guarantor created a capital contribution, which would give him stock basis to deduct the loss. Also, he argued that since the bank expected him as guarantor to repay the loan, that expectation created basis in the S corporation.
The tax court held that the shareholder did not have basis to deduct losses. Their basis was determined by the fact that the shareholder provided no evidence that the bank looked for him to pay instead of the S corporation. Also, there was no indication who actually made the loan payments. The original loan stated that it was secured by inventory and equipment and the renewal was not in the shareholder’s name, but the S corporation.
The tax court concluded that the S corporation operated after liquidation and the bank looked to the S corporation to pay the loan, not the guarantor. Based on these findings, the court held in favor of the IRS.
The tax court has confirmed that a guarantee does not constitute basis again and again. In order for a shareholder of a S corporation to get basis from a loan, the shareholder must put cash in directly. If it comes from a bank or other source, it does not create debt basis.
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