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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
1996 LC CASE SUMMARIES Civil Action No. 94-B-2769, 1996 U.S. Dist. Lexis 8113 (D. Colo. June 3, 1996).
Topics:
Allowable business loss deductions under IRC -165 for a guarantor of a L/C.
Type of Lawsuit:
By guarantor against Internal Revenue Service for a greater refund and by Internal Rev-enue Service against guarantor for reimbursement of an excessive refund.
Principals:
Plaintiff/Guarantor/Owner of Borrower and Owner of Beneficiary: Robert V. George, Esquire;
Defendant: U.S. Internal Revenue Service (IRS);
Issuer: Westport Bank & Trust;
Applicant/Borrower: Skyhook, Inc.;
Beneficiary: Integrated Resources Equip. Group
Underlying Transaction:
Security for lease agreement.
LC:
Standby Credit for US $225,000. Silent as to whether UCP applies.
Procedural History:
Magistrate Judge Abram recommends to Judge Babcock of the United States District Court for the District of Colorado that he deny guarantor's motion for summary judgment and grant IRS's motion for summary judgment.
Rule:
Guarantor's deduction of business losses resulting from applicant's failure to repay the guaranteed letter of credit is limited to the guarantor's actual losses, not the amount the applicant failed to repay.
Article
Factual Summary: To assure lease payments to beneficiary, applicant caused a letter of credit to be opened in the amount of US $225,000. The credit was secured by a US $225,000 loan from issuer to applicant. This loan was personally guaranteed by applicant's owner who granted a second mortgage on his property. The US $225,000 proceeds were placed into an account with the issuer. Applicant defaulted on the lease payments and the beneficiary drew the full amount of the US $225,000. Issuer obtained a judgment against the guarantor in the amount of US $225,000 which was settled for US $25,000. The IRS allowed guarantor a US $25,000 income tax deduction, whereas guarantor argues that he should be allowed a US $225,000 deduction.
Legal Analysis:
1. IRC -165: Guarantor argued that his guarantee of the issuer's business loan to applicant which secured the applicant's letter of credit, entitles him to an income tax deduction of US $225,000 which was the total amount of his personally guaranteed corporate obligations. The magistrate rejected this argument stating that the applicant, not the guarantor, borrowed from the issuer and it was the applicant which used the proceeds to fund the letter of credit. Since guarantor settled the judgment obtained by issuer against guarantor for the amount of US $25,000, the court found the guarantor is limited in his IRC - 165 business loss deductions to US $25,000.
©1997 INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
COPYRIGHT OF THE INSTITUTE OF INTERNATIONAL BANKING LAW & PRACTICE
The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.