- 6 -
1981-608.5 The economic outlay required under section
1366(d)(1)(B) must leave "the [taxpayers] poorer in a material
sense." Perry v. Commissioner, 54 T.C. 1293, 1296 (1970), affd.
per order (8th Cir. 1971) (quoting Horne v. Commissioner, 5 T.C.
250, 254 (1945)). Although a bona fide loan from a shareholder
to an S corporation will increase the shareholder's basis, the
shareholder must make an actual economic outlay and directly
incur the indebtedness. Underwood v. Commissioner, 63 T.C. 468,
476 (1975), affd. 535 F.2d 309 (5th Cir. 1976). As was noted by
this Court in Raynor v. Commissioner, 50 T.C. 762, 770-771
(1968):
No form of indirect borrowing, be it guaranty, surety,
accommodation, comaking or otherwise, gives rise to
indebtedness from the corporation to the shareholders
until and unless the shareholders pay part or all of
the obligation. Prior to that crucial act, "liability"
may exist, but not debt to the shareholders. * * *
The shareholders must make actual disbursements on the
indebtedness before they can augment their bases for the purpose
of deducting losses. Estate of Leavitt v. Commissioner, supra at
422. Since petitioners have not made actual disbursements on the
loans, they are not entitled to increase their bases.
5 Most of the cases interpreting "indebtedness of the S
corporation to the shareholder" apply to former sec. 1374(c)(2).
That section was repealed by the Subchapter S Revision Act of
1982, Pub. L. 97-354, sec. 2, 96 Stat. 1669, 1677-1683, effective
for tax years beginning after Dec. 31, 1982. There are no
differences between former sec. 1374(c)(2)and the current sec.
1366(d)(1)(B) that affect this analysis.
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