Taylor is the sole shareholder of Swift Products, Inc., a calendar-year S corporation. Taylor has asked for your assistance in securing bank financing. Swift has fallen on hard times and will have a large operating loss for the year. Assume that Taylor does not have any stock basis. You realize that any lender is going to ask for Taylors personal guarantee for any loans made to Swift since Taylor has a substantial personal net worth. Taylor lacks personal liquidity and because of market conditions, Taylor is resistant to selling assets to obtain the liquidity necessary to increase stock basis. Taylor will be interested in claiming any Swift losses on her personal tax return.

Assume that you work for an accounting firm. Draft a memorandum to your manager regarding the following:

• Taylor's options to produce a favorable tax result relative to the proposed loan transaction and recommend a strategy.
• Read Treas.Reg.Section1.1366-2and describe what the IRS position may be regarding the proposed loan transaction relative to Taylor's loss deduction as well as any other strategies the subject of your advice in1.above.

As an aside to your memo, comment on the Treas. Reg. Section 1.1366-2 approach to shareholder guarantees of entity-level debt along with IRS treatment of other debt structures that have been used to enhance shareholder loss deduction. Specifically, do you think the approach taken in the IRS Regulation is supportable and able to be effectively administered? Support your position by explaining why or why not.