Selfe v. United States

1. Selfe v. United States 778 F.2d 769 (11th.Cir, 1985) Circuit Judge Kravitch Kimberly DeCarrera Advanced Federal Taxation July 11, 2007

2. The Facts • S Corporation: Jane Simon, Inc. • Financing from First National Bank of Birmingham in 1977 for $120,000 • Pledged 4500 shares of Avondale Mills stock as collateral • Line of credit made to owner, individually • Business begins operations in August 1977 • Suffers losses through 1980

3. The Facts • Fiscal year ending June 30, 1980: Claimed losses on joint personal return of $33,824 • Government limits it to $4,946, the adjusted basis in the corporation. • Taxpayer pays deficiency, files a claim for refund. • District Court: Summary judgment for the government

4. The Code Sections • § 1366(a): Shareholder in subchapter S corporation may deduct his portion of the corporation’s loss from personal income. • § 1366(d): Limits the amount of the deduction to the sum of the adjusted basis of the shareholder’s stock in the corporation plus the adjusted basis of any indebtedness of the corporation to the shareholder.

5. The Issue • Whether the taxpayer’s guarantee of the corporate loan was in itself a contribution to the corporation sufficient to increase the taxpayer’s basis in the corporation

6. Other Cases • Plantation Patterns, Inc. v. Commissioner (5th.Cir, 1972): a loan is deemed to be made to the stockholders who has guaranteed a corporate note when the facts indicate that the lender is looking primarily to the stockholder for repayment (not subchapter S corporation) • Brown v. Commissioner (6th.Cir, 1983): an economic outlay resulting in an increase in a shareholder’s basis in a Subchapter S corporation occurs only when the shareholder-guarantor is called upon to pay the corporation’s debt.

7. Form vs. Substance • Taxpayers are ordinarily bound by the “form” of their transactions and may not argue that the “substance” of their transactions triggers different tax consequences. • But... Not always... • Characterization of debt vs. equity. • Debtor-Creditor vs. Corporation-shareholder • Where the nature of a taxpayer’s interest in a corporation is in issue, courts may look beyond the form of the interest and investigate the substance of the transaction. (An exception to the form vs. substance argument)

8. Conclusion • 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.

9. Conclusion • Summary Judgment was inappropriate. Remanded to district court for a “determination of whether or not the bank primarily looked to Jane Selfe (shareholder) for repayment and ... To determine if the taxpayer’s guarantee amounted to either an equity investment in or shareholder loan to Jane Simon, Inc.” • District Court to apply Plantation Patterns.