- 26 -
requirement that an economic outlay be made before a
corresponding increase in basis can occur. Harris v. United
States, supra; see Underwood v. Commissioner, supra at 312.
Thus, Wise and Eicher may not increase their respective bases in
WRI with respect to the HMC loan. We agree with respondent on
this issue.
2. "Loan Backs"
a. Hersco Mortgage
Petitioners contend that Wise's and Eicher's bases in WRI
increased by their share of the "loan backs" related to the
Hersco mortgage. Respondent contends that the "loan backs" may
not be included in Wise's and Eicher's bases because the "loan
backs" are not real debt, and the "loan backs" were between WRI
and Hersco, not between WRI and Wise or Eicher. Petitioners
contend that the "loan backs" are bona fide debt and that Hersco
was an agent or conduit for Wise and Eicher. We agree with
respondent.
As discussed at par. B-1, above, WRI did not pay the Hersco
mortgage. Wise recorded the purported payments with yearend
journal entries in WRI's books and records. WRI did not make an
economic outlay with respect to the Hersco mortgage. The claimed
"loan backs" existed only as journal entries in Hersco's books;
they are not bona fide debts or economic outlays because Hersco
did not receive anything it could lend to WRI. Underwood v.
Commissioner, supra at 311-312.
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