## Facts

- Cathaleen Uri and Stevens Townsdin each contributed $10,000 to capitalize The Old Opera House Mall Company and each owned 50% of its stock.
- The corporation elected S corporation status under subchapter S.
- The corporation obtained a bank loan secured by corporate real estate and assets and additionally supported by the shareholders’ personal guarantees.
- The business failed; the corporation and the shareholders entered bankruptcy, and the corporate loan was not fully satisfied from corporate assets.
- On their individual returns, Uri and Townsdin claimed S-corporation loss deductions based on their capital contributions and their pro rata shares of the guaranteed bank loan.
- The Commissioner disallowed the loss deduction amounts attributable to the guarantees, and the Tax Court sustained the deficiencies.

## Issues

1. Whether an S-corporation shareholder may increase adjusted basis in stock (or qualifying debt basis) by the pro rata amount of a personal guarantee of corporate bank debt, without having made any payment on the guarantee, to claim larger pass-through loss deductions under former I.R.C. § 1374.

## Decision

- The Tenth Circuit affirmed the Tax Court.
- The court held that a shareholder’s personal guarantee of corporate debt, without actual payment, does not increase the shareholder’s adjusted basis for purposes of deducting S-corporation losses.
- Because the taxpayers did not show an actual payment converting the corporate debt into indebtedness owed to them, the disallowed portions of the deductions were properly denied.

## Legal Principles

- Under former I.R.C. § 1374, an S-corporation shareholder’s loss deduction is limited to the sum of the shareholder’s adjusted basis in S-corporation stock and the shareholder’s adjusted basis in indebtedness of the corporation to the shareholder.
- A mere personal guarantee of corporate debt is a contingent obligation and does not constitute an “economic outlay” that increases shareholder basis.
- Basis in corporate indebtedness to the shareholder generally arises only when the shareholder actually pays on the guarantee and thereby becomes a creditor of the corporation.

## Conclusion

The court held that shareholders cannot increase S-corporation basis—and thus cannot expand allowable pass-through loss deductions—based solely on personally guaranteeing corporate bank debt; an actual payment is required to create basis.


Uri v. Comm’r, 949 F.2d 371 (10th Cir. 1991)