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Memo. 2000-139; see also Yates v. Commissioner, T.C. Memo.
2001-280. In cases where a shareholder claims basis in an S
corporation for funds advanced initially by a related entity, the
Court will closely scrutinize the facts surrounding the transfer
of funds to determine whether they establish a relationship that
allows the shareholder to satisfy the requirements for an
increase in basis. “Ordinarily, taxpayers are bound by the form
of the transaction they have chosen; taxpayers may not in
hindsight recast the transaction as one that they might have made
in order to obtain tax advantages.” Harris v. United States,
902 F.2d 439, 443 (5th Cir. 1990); see also Estate of Leavitt v.
Commissioner, 875 F.2d at 423 (“taxpayers are liable for the tax
consequences of the transaction they actually execute and may not
reap the benefit of recasting the transaction into another one
substantially different in economic effect that they might have
made”).
In a case where a C corporation acted as the agent of a
shareholder in disbursing funds to an S corporation, and the S
corporation acknowledged a direct debt to the shareholder and not
to the C corporation, the Court held that the shareholder’s basis
in the S corporation was increased. Culnen v. Commissioner,
supra. The Court found that the shareholder’s loan account in
his wholly owned C corporation was debited when he requested
funds be disbursed to the S corporation to allow the shareholder
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