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corporation. The deductions, however, are limited to the sum of
the adjusted basis of the shareholders' stock in the corporation,
sec. 1366(d)(1)(A), and the adjusted basis of any indebtedness of
the corporation to the shareholders, sec. 1366(d)(1)(B).
Petitioners contend that they were primary obligors under
the loans and that Bank One looked primarily to Mr. Hafiz and to
his personal assets for repayment. Petitioners argue that the
loans at issue should be viewed as loans to petitioners, followed
by a loan from petitioners to Family Motels for the same amount.
Petitioners assert that they are entitled to increase their bases
in the indebtedness of the corporation to them by the amount of
the loans. In the alternative, petitioners argue that they
should be entitled to increase their bases in the indebtedness of
Family Motels by a portion4 of the loans. Respondent contends
that because petitioners did not make any payments under the
loans, petitioners are not entitled to increase their bases.
To increase the basis in the indebtedness of an S
corporation, there must be an economic outlay on the part of the
shareholder. Estate of Leavitt v. Commissioner, 875 F.2d 420,
422 (4th Cir. 1989), affg. 90 T.C. 206 (1988); Brown v.
Commissioner, 706 F.2d 755, 756 (6th Cir. 1983), affg. T.C. Memo.
4 Petitioners argue that because Mr. Hafiz, Mrs. Hafiz,
Family Motels, and Abdul Hafiz, M.D., Inc., were the obligors
under the loans, they should be entitled to increase their bases
in their stock by one-half of the amount of the loans.
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