FILED
                           NOT FOR PUBLICATION
                                                                           DEC 27 2019
                    UNITED STATES COURT OF APPEALS                      MOLLY C. DWYER, CLERK
                                                                         U.S. COURT OF APPEALS


                            FOR THE NINTH CIRCUIT


DANA D. MESSINA; NANCY G.                        No.   18-70186
MESSINA,
                                                 Tax Ct. No. 25510-15
              Petitioners-Appellants,

 v.                                              MEMORANDUM*

COMMISSIONER OF INTERNAL
REVENUE,

              Respondent-Appellee.



KYLE R. KIRKLAND; STEPHANIE                      No.   18-70187
LAYNE,
                                                 Tax Ct. No. 25567-15
              Petitioners-Appellants,

 v.

COMMISSIONER OF INTERNAL
REVENUE,

              Respondent-Appellee.


                           Appeals from a Decision of the
                             United States Tax Court

      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
                     Argued and Submitted November 13, 2019
                             San Francisco, California

Before: THOMAS, Chief Judge, and TASHIMA and WARDLAW, Circuit
Judges.

      Dana Messina, Nancy Messina, Kyle Kirkland, and Stephanie Layne

(collectively, the “Taxpayers”), appeal the Tax Court’s decision affirming

deficiencies that the Commissioner of Internal Revenue (the “Commissioner”)

identified in the tax returns that each couple jointly filed for the 2012 tax year. We

have jurisdiction pursuant to 26 U.S.C. § 7482(a)(1), and we affirm.

      We review de novo “the Tax Court’s interpretation of the Internal Revenue

Code and its legal conclusions” as well as its “application of law to a stipulated

factual record.” Sewards v. Comm’r, 

, 1334 (9th Cir. 2015). We

review for clear error any “factual inferences drawn from a stipulated record.”

Teruya Bros., Ltd. v. Comm’r, 

, 1043 (9th Cir. 2009).

                                           I

      The Tax Court correctly concluded that Taxpayers, in calculating Kirkland

and Messina’s debt basis in Club One Acquisition Corp. (“Club One”), improperly

relied on a debt that Club One owed KMGI, Inc. (“KMGI”), another S corporation

owned by Kirkland and Messina. The Internal Revenue Code, 26 U.S.C. § 1 et



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seq., by its plain terms, limits the debt basis that a shareholder may claim in an

S corporation to “any indebtedness of the corporation to the shareholder.” 26

U.S.C. § 1366(d)(1)(B). An S corporation’s indebtedness to another entity, even

one wholly owned by the shareholder, does not increase the amount of pass-

through deductions the shareholder can claim. Because the relevant debt runs to a

related entity, but not Kirkland and Messina themselves, it does not increase the

debt basis that Taxpayers may claim in Club One.

                                        II

      Taxpayers argue that Club One’s debt runs directly to them in substance, if

not in form and, therefore, that we should disregard the form. We have not held

that the “substance over form” doctrine is available to a taxpayer as well as the

government. Indeed, we have previously rejected the notion that the taxpayer can

“escape the tax consequences of a business arrangement which he made upon the

asserted ground that the arrangement was fictional.” Maletis v. United States, 

, 98 (9th Cir. 1952) (quoting Love v. United States, 

, 921

(Ct. Cl. 1951)).

      Nonetheless, even assuming, arguendo, that the doctrine is available to the

Taxpayers, it does not assist them here. As the Tax Court properly held, the form

of the loan acquisition in this case “corresponds to its substance” and should


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therefore “be respected for Federal tax purposes as it was implemented.” Messina

v. Comm’r, T.C. Memo. 2017-213, 

, at *16 (2017).

      KMGI’s purchase of the third-party loan directly, rather than through

Kirkland and Messina, was motivated by a number of non-tax business and

regulatory considerations. In all circumstances except their tax returns, Taxpayers

treated KMGI as an independent entity that was to acquire the third-party loan and

serve as Club One’s creditor. They reaped several benefits from doing so,

including avoidance of a foreclosure on the casino that they co-own through Club

One and a call on the personal guaranties that they signed in connection with the

third-party loan. In addition, KMGI served business functions, including: being

able to apply for the Gambling Commission’s permission to acquire the loan;

purchasing the loan from the third party potentially to maintain the loan’s seniority

to Club One’s other obligations; receiving loan payments from Club One; and

returning capital contributions to Kirkland and Messina. Thus, even if the

“substance over form” doctrine were available to Taxpayers, it does not alter the

outcome here

      For similar reasons, Taxpayers’ other arguments are not persuasive. No

court has adopted their “economic outlay” theory, and it does not apply to the facts

of this case. The “step transaction” doctrine, see Brown v. United States, 

664, 671–72 (9th Cir. 2003), does not apply because it rests on the unsupported

premise that KMGI was a mere conduit with no business purpose or other activities

other than maintaining a bank account.

                                         III

      In sum, absent a basis in Club One that equals or exceeds their claimed

deductions, Taxpayers fail to satisfy their “burden of clearly showing” that they are

entitled to those deductions, Stahl v. United States, 

, 522 (9th Cir.

2010) (internal citation omitted); see also 26 U.S.C. § 1366(d)(1) (limiting pass-

through deductions that shareholder may claim to “shareholder’s basis in stock and

debt”). Accordingly, the Tax Court correctly concluded that the deficiencies

assessed by the Commissioner were proper.

      AFFIRMED.




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