Jerry L. Thomas and Freda Thomas - Page 14




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          provided those funds and that the disputed transactions increased           
          their basis in Ram.                                                         
               The decided cases have established certain principles                  
          concerning when a shareholder may claim increased basis in an S             
          corporation investment.  First, there must be an actual economic            
          outlay by the taxpayer who claims the basis increase.  Underwood            
          v. Commissioner, 535 F.2d 309 (5th Cir. 1976) (rearrangement by             
          way of exchange of notes in respect of loan of funds by a C                 
          corporation to an S corporation insufficient), affg. 63 T.C. 468            
          (1975); Estate of Leavitt v. Commissioner, 90 T.C. 206 (1988)               
          (existence of a contingent liability of a shareholder as                    
          guarantor insufficient), affd. 875 F.2d 420 (4th Cir. 1989);                
          Perry v. Commissioner, 54 T.C. 1293, 1296 (1970) (exchange of               
          notes between shareholder and S corporation insufficient), affd.            
          27 AFTR 2d 71-1464, 71-2 USTC par. 9502 (8th Cir. 1971).  Second,           
          the indebtedness of the S corporation must run directly to the              
          shareholder claiming an increase in basis; an indebtedness of an            
          S corporation to an entity with passthrough characteristics which           
          advanced the funds and is closely related to the taxpayer does              
          not satisfy this requirement.  See, e.g., Frankel v.                        
          Commissioner, 61 T.C. 343 (1973) (partnership), affd. without               
          published opinion 506 F.2d 1051 (3d Cir. 1974); Prashker v.                 
          Commissioner, 59 T.C. 172 (1972) (estate); Burnstein v.                     
          Commissioner, T.C. Memo. 1984-74 (S corporation).                           






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