Featured Chrome Extensions:

Casey IRACs are produced by an AI that analyzes the opinion’s content to construct its analysis. While we strive for accuracy, the output may not be flawless. For a complete and precise understanding, please refer to the linked opinions above.

Keywords

equityappealsummary judgmentcorporation
appealsummary judgmentcorporation

Related Cases

Nu-Look Design, Inc. v. C.I.R., 356 F.3d 290, 93 A.F.T.R.2d 2004-608, 2004-1 USTC P 50,138, Unempl.Ins.Rep. (CCH) P 17,147
View Case »
Helvering v. Walbridge, 293 U.S. 594, 55 S.Ct. 109 (Mem), 79 L.Ed. 688
View Case »
Commissioner of Internal Revenue v. Idaho Power Co., 414 U.S. 999, 94 S.Ct. 351 (Mem), 38 L.Ed.2d 235
View Case »
Dunn & Clark, P.A. v. C.I.R. for and on Behalf of U.S., 57 F.3d 1076, 1995 WL 338811, 75 A.F.T.R.2d 95-2714, 95-2 USTC P 50,383
View Case »
Monroe v. Commissioner of Social Security, 676 Fed.Appx. 5
View Case »
Justia Law Link
LexisNexis Link
Westlaw Link
CourtListener Link
Oyez Link

Selfe v. U.S., 778 F.2d 769, 57 A.F.T.R.2d 86-464, 86-1 USTC P 9115

Facts

Taxpayer Jane B. Selfe entered into a retail clothing business in 1977 and secured a line of credit from the First National Bank of Birmingham by pledging stock. After incorporating her business, the loans were converted to corporate loans, and Selfe guaranteed the corporation's debt. The corporation suffered losses but did not default on the loans. The government later limited the amount of loss Selfe could deduct based on her adjusted basis in the corporation, leading her to seek a refund for the disallowed deduction.

Taxpayer, Jane B. Selfe, formerly Jane Simon, entered into a retail clothing business in 1977 under the name of Jane Simon, Inc. She applied to the First National Bank of Birmingham for financing. In consideration of her pledge of 4500 shares of stock in Avondale Mills owned by her and close family members, the bank agreed to extend a line of credit to her in the amount of $120,000 for use in the business.

Issue

Whether a shareholder in a Subchapter S corporation, who personally guarantees and secures a corporate debt, may increase the adjusted basis of her stock by the full amount of the debt to maximize her loss deductions under I.R.C. section 1374.

This appeal requires us to determine whether a shareholder in a Subchapter S corporation, who personally guarantees and secures a corporate debt, may increase the adjusted basis of her stock by the full amount of the debt in order to maximize her loss deductions under I.R.C. section 1374.

Rule

I.R.C. section 1374 allows a shareholder in a Subchapter S corporation to deduct their portion of the corporation's net operating loss from personal income, limited to the adjusted basis of the shareholder's stock and any indebtedness of the corporation to the shareholder.

I.R.C. section 1374 permits a shareholder in a Subchapter S corporation to deduct his portion of the corporation's net operating loss from his personal income.

Analysis

The court analyzed whether the taxpayer's guarantee of the corporate loan constituted a contribution to the corporation that would increase her basis. It noted that under the principles established in Plantation Patterns, a shareholder's guarantee could be treated as an equity investment if the lender primarily looked to the shareholder for repayment. The court found that there were genuine issues of material fact regarding the nature of the loan and the shareholder's basis, which precluded summary judgment.

We conclude that under the principles of Plantation Patterns, a shareholder who has guaranteed a loan to a Subchapter S corporation may increase her basis where the facts demonstrate that, in substance, the shareholder has borrowed funds and subsequently advanced them to her corporation.

Conclusion

The Court of Appeals reversed the district court's summary judgment in favor of the government and remanded the case for further proceedings to determine the nature of the loan and whether the taxpayer's guarantee constituted an increase in her basis.

Reversed and remanded.

Who won?

The taxpayer, Jane B. Selfe, prevailed in the appeal because the court found that there were genuine issues of material fact regarding her ability to increase her basis due to her guarantee of the corporate loan.

The Court of Appeals, Kravitch, Circuit Judge, held that: (1) a shareholder who guarantees a loan to a Subchapter S corporation may increase her basis where the facts demonstrate that, in substance, the shareholder has borrowed funds and subsequently advanced them to her corporation, and (2) genuine issues of material fact precluded summary judgment in favor of the Government.

You must be