Abdul Hafiz and Rawnaq A. Hafiz - Page 6

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          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          That section was repealed by the Subchapter S Revision Act of               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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