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To prevail in this case, petitioners must prove that Jerry,
as opposed to one of his entities, invested in Ram. E.g.,
Prashker v. Commissioner, supra at 176 (where the estate of which
the taxpayer was executrix and the sole beneficiary advanced
funds to an S corporation of which she was a 50-percent
shareholder, the Court noted that “the key question is whether or
not the debt of the corporation runs ‘directly to the
shareholder’”). In other words, petitioners must prove that they
made the economic outlay and that the disputed transactions
created indebtedness on the part of Ram that ran directly to
Jerry. Id. (“a shareholder could borrow the money personally and
then loan the money to the corporation. In that event the
corporation’s debt would run directly to the shareholder”);
accord Hitchins v. Commissioner, 103 T.C. 711, 715 (1994) (where
the Court stated that an indebtedness to an entity with
pass-through characteristics that had advanced the funds to the S
corporation and was closely related to the taxpayer generally did
not satisfy the statutory requirements necessary to increase a
shareholder’s basis).
In a limited number of situations, the fact that the
borrowed funds originate with a closely related entity will not
preclude a finding that the indebtedness of the S corporation
runs directly to the shareholder and amounts to an economic
outlay by the shareholder. See Culnen v. Commissioner, T.C.
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