- 21 -
is only secondarily and conditionally liable. The
principle underlying the doctrine extends beyond such
circumstances to transactions which purport to be
direct loans. * * * [Citations omitted.]
Thus, “A taxpayer claiming a deduction [under section 1366(d)(1)]
must show it was based on ‘some transaction which when fully
consummated left the taxpayer poorer in a material sense.’” Id.
at 932-933 (quoting Perry v. Commissioner, 54 T.C. 1293, 1296
(1970), affd. 27 AFTR 2d 71-1464, 71-2 USTC par. 9502 (8th Cir.
1971)). Our concern under section 1366(d)(1)(B) is whether a
shareholder has, in substance, lent money to the S corporation.
See id., at 930 n.6.
The various disbursements in 1993, 1994, and 1995 were the
equivalent of offsetting bookkeeping entries, even though they
occurred in the form of checks and a wire transfer. For example,
in 1993, Dart lent $4 million to Mr. Oren, Mr. Oren lent $4
million to HL, and HL lent $4 million to Dart. The loan
transactions did not have a net economic effect. None of the $4
million that Dart lent to Mr. Oren was retained by a party other
than Dart.12 Indeed, the loan proceeds originated with Dart and
ended with Dart. The only significance of the transactions was
the circular route of the various checks and the wire transfer
12For an investment, we would at a minimum expect that the S
corporation would retain the loan proceeds for use in its
business operations. In this case, the loans to HL and HS simply
entered the “front door”, immediately exited through the “back
door”, and were returned to Dart.
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