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III. Bank Loan Proceeds
At the end of 1997, petitioner borrowed $800,000 from the
Bank. Contemporaneously, petitioner purportedly lent Marc
$800,000, by writing a check for $800,000 to Marc, which
contemporaneously wrote checks totaling $800,000 to Lakeview and
Pleasant Prairie, which shortly thereafter paid $800,000 to
petitioner, who used the funds to pay off the Bank note, 11 days
after its creation. The issue is whether petitioner made any
economic outlay to Marc so as to create basis therein.
In Oren v. Commissioner, T.C. Memo. 2002-172, affd. 357 F.3d
854 (8th Cir. 2004), the Courts considered a circular funds-
juggling arrangement similar to that involved in the instant
case. In Oren, the taxpayer borrowed funds from an S
corporation, Dart Transit Co. (Dart), which he controlled and
owned a majority interest in. The taxpayer then lent these funds
to his two wholly owned S corporations; over time, these S
corporations lent the funds back to Dart. This Court held that
the loan transactions had no net economic effect, noting that the
loan proceeds originated and ended with Dart. This Court stated:
“The only significance of the transactions was the circular route
of the various checks and the wire transfer and the execution of
promissory notes. The economic positions of the parties did not
change.” Id. Concluding that the circular loans involved no
actual economic outlay, this Court disallowed the taxpayer’s
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