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1366(d)(1)(B) must leave “‘the taxpayer poorer in a material
sense’” after the transaction than when the transaction began.
Perry v. Commissioner, 54 T.C. 1293, 1296 (1970) (quoting Horne
v. Commissioner, 5 T.C. 250, 254 (1945)), affd. per order 27 AFTR
2d 1464, 71-2 USTC par. 9502 (8th Cir. 1971). 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. See
Underwood v. Commissioner, 63 T.C. 468, 476 (1975), affd. 535
F.2d 309 (5th Cir. 1976).
Respondent contends that petitioners have insufficient bases
to claim 1992 losses because they failed to establish that they
made additional capital contributions or extended additional
loans in 1992. Petitioners argue that they wrote checks and made
direct loans to Olympic.
At trial, petitioners presented an unorganized collection of
checks and financial records. They had previously presented
these same documents to respondent during the audit examination.
Even though the records were not in order and were difficult to
understand, neither petitioners nor their return preparer
attempted to explain the records in any detail.
Moreover, Olympic’s corporate records do not reflect that
petitioners made any loans to Olympic during 1991 or 1992.
Olympic’s 1991 and 1992 Schedules L do not list any loans from
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