- 20 -
because there has not been an “actual economic outlay” by the
shareholder to the corporation. See, e.g., Estate of Bean v.
Commissioner, supra at 558-559; Estate of Leavitt v.
Commissioner, 90 T.C. 206, 211 (1988), affd. 875 F.2d 420 (4th
Cir. 1989).11 Petitioners argue that funds lent directly from a
shareholder to an S corporation create basis under section
1366(d), and an actual economic outlay is not required, even if
other transactions offset the direct loan. Petitioners argue
that an actual economic outlay is required only where there is a
shareholder guaranty. Essentially, petitioners are arguing that
the “form” of a direct loan from a shareholder to an S
corporation is sufficient to increase basis in indebtedness under
section 1366(d)(1)(B).
A shareholder must make an actual economic outlay to
increase basis in an S corporation, even if the shareholder has
made a direct loan. Bergman v. United States, 174 F.3d 928, 932
(8th Cir. 1999); Underwood v. Commissioner, 535 F.2d 309, 311-313
(5th Cir. 1976), affg. 63 T.C. 468 (1975). Indeed, in Bergman v.
United States, supra at 933, the Court of Appeals for the Eighth
Circuit stated:
The economic outlay doctrine does not apply only
to loan guarantees, but it has been used to explain
that a shareholder who guarantees a bank loan to an S
corporation does not create additional basis because he
11But see Selfe v. United States, 778 F.2d 769 (11th Cir.
1985).
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