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precedentappealtrustleasecorporation
precedentappealtrustcorporation

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Sleiman v. C.I.R., 187 F.3d 1352, 84 A.F.T.R.2d 99-5987, 99-2 USTC P 50,828, 12 Fla. L. Weekly Fed. C 1273

Facts

Eli and Peter Sleiman, along with Anthony Sleiman, were shareholders in their respective S corporations, Real Estate Equities, Inc. (REE) and Triple Net Equities, Inc. (TNE). Both corporations entered into lease agreements with Blockbuster Video and faced challenges due to environmental contamination of the properties. They secured loans from SouthTrust Bank, which were personally guaranteed by Eli and Peter. The Sleimans claimed that these guarantees should increase their adjusted bases in the corporations, but the IRS disagreed, leading to the notices of deficiency.

Eli and Peter Sleiman, along with Anthony Sleiman, were shareholders in their respective S corporations, Real Estate Equities, Inc. (REE) and Triple Net Equities, Inc. (TNE).

Issue

Whether the Tax Court erred in determining that Eli and Peter could not increase their adjusted bases in their S corporations by the amount of loans they personally guaranteed.

Whether the Tax Court erred in determining that Eli and Peter could not increase their adjusted bases in their S corporations by the amount of loans they personally guaranteed.

Rule

A shareholder in an S corporation may increase her basis in the corporation by the amount of the debt where the facts demonstrate that, in substance, the shareholder has borrowed funds and subsequently advanced them to her corporation.

A shareholder in an S corporation may increase her basis in the corporation by the amount of the debt where the facts demonstrate that, in substance, the shareholder has borrowed funds and subsequently advanced them to her corporation.

Analysis

The Tax Court distinguished the Sleimans' situation from the precedent set in Selfe v. United States, finding that the loans from SouthTrust were not in substance loans to Eli and Peter followed by capital contributions to their S corporations. The court noted that the loans were made directly to REE and TNE, which had sufficient collateral and cash flow to service the loans, indicating that the bank primarily looked to the corporations for repayment rather than to the shareholders personally.

The Tax Court distinguished the Sleimans' situation from the precedent set in Selfe v. United States, finding that the loans from SouthTrust were not in substance loans to Eli and Peter followed by capital contributions to their S corporations.

Conclusion

The Court of Appeals affirmed the Tax Court's decision, concluding that the Sleimans could not include the amounts of the guaranteed loans in their bases in REE and TNE.

The Court of Appeals affirmed the Tax Court's decision, concluding that the Sleimans could not include the amounts of the guaranteed loans in their bases in REE and TNE.

Who won?

The Commissioner of Internal Revenue prevailed in the case because the court upheld the Tax Court's ruling that the personal guarantees did not constitute capital contributions that would increase the shareholders' bases.

The Commissioner of Internal Revenue prevailed in the case because the court upheld the Tax Court's ruling that the personal guarantees did not constitute capital contributions that would increase the shareholders' bases.

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