          Case: 17-14439     Date Filed: 05/17/2018   Page: 1 of 7


                                                          [DO NOT PUBLISH]



           IN THE UNITED STATES COURT OF APPEALS

                   FOR THE ELEVENTH CIRCUIT
                     ________________________

                            No. 17-14439
                        Non-Argument Calendar
                      ________________________

                           Agency No. 029495-14



RUPERT E. PHILLIPS,
SANDRA K. PHILLIPS,

                                                      Petitioners - Appellants,

                                   versus

COMMISSIONER OF
INTERNAL REVENUE,

                                                      Respondent - Appellee.



                      ________________________

                   Petition for Review of a Decision
                          of the U.S. Tax Court
                    ________________________

                              (May 17, 2018)
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Before WILSON, NEWSOM, and FAY, Circuit Judges.

PER CURIAM:

      Appellants Rupert and Sandra Phillips were shareholders in Olson &

Associates, a real estate development entity. The Phillipses, among others,

guaranteed loans made to the corporation. When Olson defaulted on its loans, the

third-party lenders sued, and the Phillipses were found jointly and severally liable,

along with the other guarantors and the corporation itself, for the debt. The

Phillipses have yet to make a payment towards these judgments. On subsequent

tax returns, however, the Phillipses took the position that the entry of these

judgments alone entitled them to an increased basis in Olson, along with the tax

deduction that accompanies such an increase. The IRS, and ultimately the Tax

Court, disagreed, and the Phillipses appealed. For the reasons following, we

AFFIRM the judgment of the Tax Court.

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      The facts of this case are not in dispute. Rupert and Sandra Phillips were

married and filed joint tax returns for the years at issue in this appeal. Sandra

Phillips was a 50-percent shareholder in Olson & Associates of NW Florida, Inc.,

an S corporation specializing in real estate development. Rupert Phillips was an

Olson employee.




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        Olson organized special-purpose entities for each of its projects, through

which it obtained bank loans to finance land acquisition and project development.

Each loan was secured by the assets of the relevant special-purpose entity, but was

also guaranteed by Olson & Associates, its shareholders, and sometimes the

shareholders’ spouses.

        Like many similar businesses, Olson was hit hard by the economic downturn

in the latter half of the 2000s. Many of its projects failed, and the loans financing

them went into default. Banks brought state court actions for repayment against

the relevant special-entities and the loans’ guarantors, including the Phillipses. In

2008 and 2009, ten of these actions resulted in judgments ordering the sale of the

property securing each loan and holding the corporate debtor and individual

guarantors jointly and severally liable for the remaining debt. As of yet, Ms.

Phillips has not made any payments toward the judgments.

        Despite having not yet contributed any money toward the payment of these

judgments, the Phillipses claim that Sandra was entitled to increase her basis in her

Olson stock by virtue of her liability alone. Specifically, the Phillipses argue

Sandra is entitled to additional basis of $1,553,360 for 2008 and $30,187,246 for

2009.

        The tax court summarized the tax ramifications flowing from these claimed

basis increases as follows. On their 2008 amended return the Phillipses claimed a


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Schedule E loss deduction of $3,890,069, an amount $1,455,421 larger than

originally claimed on their 2008 return. For 2009, the Phillipses claimed a

Schedule E loss deduction of $10,518,948 and a Net Operating Loss of

$10,349,265. Under former Section 172(b)(1)(H), the Phillipses elected a five-

year carryback period for this NOL, applying $4,625,394 against their 2004 tax

liability and the remaining $5723,871 against their 2005 liability. They filed for

each of those two carryback years a Form 1045, Application for Tentative Refund,

and received the refund they requested.

      The Phillipses timely filed their 2010 return, on which they claimed a

Schedule E deduction of $937,000 for the flowthrough loss from Olson,

presumably relying on the unused portion of Mrs. Phillips’ purported stock basis

increase from 2009, generating an NOL for 2010 of $525,710, though the record

does not establish whether or to which year the Phillipses carried this NOL.

      After examining the Phillipses’ returns for the years at issue, the IRS

determined that Sandra was not entitled to any basis increase. Accordingly, the

IRS adjusted downward the Phillipses’ 2008 flowthrough deduction from

$3,890,069 to $2,378,899, and their 2009 flowthrough loss deduction from

$10,518,948 to $2,006,205. This left a 2009 NOL of only $1,672,363, which was

exhausted after application against the Phillipses’ 2004 tax liability, leaving no

remaining NOL for application against their 2005 tax liability. Finally, the IRS


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eliminated the Phillipses’ claimed 2010 flowthrough loss deduction in its entirety,

obviously leaving no claimed NOL for that year. The IRS then sent the Phillipses

a notice of deficiency reflecting these adjustments, after which the Phillipses

petitioned the Tax Court for review. The Tax Court upheld the IRS adjustments,

determining that an increase in basis required Mrs. Phillips to make an actual

payment toward the judgments rendered against Olson. The Phillipses now appeal,

and contend that their basis in Olson increased by virtue of their liability for the

state court judgments rendered against the corporation alone, regardless of if they

have made any actual payments towards the debt. Under our binding precedent,

however, this is simply not the case.1

                                              II

       Section 1366(a) of the Internal Revenue Code permits a shareholder of an S

Corporation to deduct her pro rata share of any net operating loss sustained by the

corporation. This deduction is limited, however, to the sum of “the adjusted basis

of the shareholder’s stock in the S corporation” and “the shareholder’s adjusted

basis of any indebtedness of the S corporation to the shareholder.” I.R.C. §§

1366(d)(1). By its very terms, the indebtedness envisioned by Section 1366(d)(1)

runs directly from the corporation to the shareholder. When the payment of a

corporation’s debts are at issue, such direct indebtedness most often occurs,

1
 Our review of the tax court’s decision is de novo. Sleiman v. Comm’r of Internal Revenue, 187
F.3d 1352, 1358 (11th Cir. 1999).
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obviously, when a shareholder “steps into a creditor’s shoes” making an actual

payment toward the corporation’s debt. See Perry v. Comm’r of Internal Revenue,

47 T.C. 159, 164 (1966). Thus, as a general rule, this Circuit requires the

shareholder make an “economic outlay”—an actual payment—toward the

corporation’s debt before she may claim an increase in her basis in the

corporation’s indebtedness. Sleiman v. Comm’r of Internal Revenue, 187 F.3d

1352, 1357 (11th Cir. 1999); see also Underwood v. Comm’r of Internal Revenue,

535 F.2d 309, 312 (5th Cir. 1976). 2 “The rule [reached] by this interpretation is no

more than a restatement of the well-settled maxim which requires that ‘[b]efore

any deduction is allowable there must have occurred some transaction which when

fully consummated left the taxpayer poorer in a material sense.’” Underwood, 535

F.2d at 311.

       It is true that we have previously held that this requirement—that a taxpayer

guarantor make an actual payment towards a corporation’s debt before she may

recognize an increased basis—may not apply in all cases. Selfe v. United States,

778 F.2d 769, 772 (11th Cir. 1985). We have since clarified, however, that this

requirement does apply unless “the facts demonstrate that, in substance, the

shareholder has borrowed funds and subsequently advanced them to her
2
  Decisions of the former Fifth Circuit handed down prior to the close of business on September
30, 1981, are binding on this Court. See Bonner v. City of Prichard, Ala., 661 F.2d 1206, 1209
(11th Cir. 1981).



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corporation.” Sleiman, 187 F.3d at 1357. Thus, the relevant inquiry is whether at

the loan’s origination the third-party lender views the corporation or the

shareholder as the primary obligor for the debt. In Sleiman, for example, we

determined that the lender looked to the corporation as the primary obligor for

repayment—rather than the taxpayer guarantor—in part because at the creation of

the loan the corporation stood as a viable entity with valuable assets, and held that

the shareholders’ mere guaranty of the loans did not qualify them for an increased

basis in the corporation. Id. Just so here. As the Phillipses admit, each lender

considered Olson & Associates, rather than the shareholder guarantors, as the

primary obligor on the loans at origination. The Phillipses’ liability for the

judgments rendered against Olson, therefore, does not “give[] rise to indebtedness

from the corporation to [them] until and unless [they] pay part or all of the

obligation.” Underwood, 535 F.2d at 312 (internal quotation and citation omitted).

“Prior to that crucial act, liability may exist, but not debt ….” Id. And at least for

purposes of this case, without debt there can be no increased basis.

      The judgment of the Tax Court is AFFIRMED.




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