- 14 -
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).
Page: Previous 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 NextLast modified: May 25, 2011