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Even if the loans were bona fide WRI debts to Hersco, Wise
and Eicher may not increase their respective bases in WRI. For
indebtedness to be considered as part of a shareholder's adjusted
basis in S corporation stock, the indebtedness must run directly
to the S corporation's shareholders; loans from an entity in
which the shareholders of the S corporation have substantial or
even identical ownership interests do not qualify. Hitchins v.
Commissioner, 103 T.C. at 715; Frankel v. Commissioner, 61 T.C.
at 347-350; Prashker v. Commissioner, 59 T.C. 172 (1972).
Petitioners rely on Burnstein v. Commissioner, T.C. Memo.
1984-74, to support their argument that Hersco was a conduit for
Wise and Eicher, and that the indebtedness runs to them as
shareholders of WRI. However, we rejected an argument to that
effect in Burnstein v. Commissioner, supra. Thus, neither Wise
nor Eicher may increase their bases in WRI as a result of
Hersco's "loan backs" to WRI. We agree with respondent on this
issue.
b. Management Fees
Petitioners contend that Wise may increase his basis in WRI
by $522,484 as a result of "loan backs" of the management fees
WRI owed him. Respondent contends that the "loan backs" are not
included in his basis because the "loan backs" are not real
indebtedness. We agree with respondent.
Wise created the management fee "loan backs" in the same way
that he created the Hersco mortgage payment "loan backs". See
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