A recently decided Tax Court case once again reinforces the rule that simply guaranteeing corporate debt in an S corporation does NOT increase that shareholder’s tax basis in his stock. However, the case has a few interesting wrinkles that merit consideration.
In William and Amaryllis Tinsley, TC Summary Opinion 2017-9 (Tax Ct.), the taxpayer was the sole shareholder of an S corporation. In 2006, the taxpayer guaranteed a $150,000 loan taken out by the corporation. In 2010, the corporation liquidated; however, business operations continued under the entity’s former name. In addition, the loan was renewed in 2011 with the S corporation as the named borrower.
On his 2010 tax return, the taxpayer reported a pass-through loss of $110,480, claiming that his assumption of the note as guarantor following the corporation’s liquidation created sufficient basis. The Internal Revenue Service disagreed, arguing that the debt remained in tack following liquidation. The Tax Court agreed with the Internal Revenue Service, concluding that the corporation, which continued to operate after its liquidation, was the primary obligor on the loan. Therefore, the taxpayer lacked sufficient basis to claim the loss because he didn’t establish that he made an economic outlay with respect to the loan.
Planning for the creation of tax basis in an S corporation through indebtedness is a complex process requiring careful consideration of the statutory guidance and the structure of the debt program. Questions regarding these matters may be addressed to Bob Grossman and Don Johnston.
