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Eicher Wise
Basis claimed $2,813,047 $2,236,140
as of 7/31/87
Adjustments
Guarantee of the HMC loan (1,250,000) (1,250,000)
Loan backs related to the (567,130) ( 340,277)
Hersco mortgage
1987 interest on the (5,308) (3,185)
Hersco mortgage
1986 Intent advances to WRI (505,635) (229,834)
Wesco's loans to WRI (588,413) (392,276)
as of 7/31/87
Loan backs related to (522,484)
management fees
Total adjustments (2,916,486) (2,738,056)
Total basis as of 7/31/87 $ 0 $ 0
A shareholder taxpayer may not increase his or her adjusted
basis unless the taxpayer made an economic outlay. See Underwood
v. Commissioner, 535 F.2d 309 (5th Cir. 1976), affg. 63 T.C. 468
(1975) (exchange of notes relating to funds lent by a C
corporation to an S corporation is insufficient to establish an
economic outlay which increases the shareholder's adjusted
basis); Hitchins v. Commissioner, 103 T.C. 711, 715 (1994); Perry
v. Commissioner, 54 T.C. 1293, 1296 (1970), affd. 27 AFTR 2d 71-
1464, 71-2 USTC par. 9502 (8th Cir. 1971) (exchange of notes
between a shareholder and an S corporation is insufficient to
establish an economic outlay which increases the shareholder's
adjusted basis). The S corporation must be directly indebted to
a shareholder for the shareholder to increase his or her basis in
stock to decide the amount of the S corporation's net operating
loss the shareholder may deduct; an indebtedness to a pass-
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