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applies because the disallowed amount exceeds the shareholder’s
economic investment in the S corporation and, because of the
limited liability accorded to S corporation shareholders, the
amount does not have to be repaid. The disallowed losses and
deductions may be carried forward indefinitely, however, and
claimed when and to the extent that the shareholder increases his
or her basis in the S corporation.6 See sec. 1366(d)(2).
Economic Outlay
A taxpayer must make an economic outlay for a loan to create
basis. A taxpayer makes an economic outlay when he or she incurs
a “cost”7 on a third-party loan or is left poorer in a material
sense after the transaction. Putnam v. Commissioner, 352 U.S. 82
(1956); Estate of Bean v. Commissioner, 268 F.3d 553, 558 (8th
Cir. 2001), affg. T.C. Memo. 2000-355; Bergman v. United States,
174 F.3d 928, 930 n.6 (8th Cir. 1999); Estate of Leavitt v.
Commissioner, 875 F.2d 420, 422 (4th Cir. 1989), affg. 90 T.C.
206 (1988); Brown v. Commissioner, 706 F.2d 755, 756 (6th Cir.
1983), affg. T.C. Memo. 1981-608; Spencer v. Commissioner, 110
T.C. 62, 83-84 (1998), affd. without published opinion 194 F.3d
6Shareholders may increase basis in an S corporation by
capital contributions, stock purchases, or extensions of
additional credit, or where the S corporation generates taxable
income.
7Basis of property is the “cost” of the property. Sec.
1012. “Cost” is defined as the “amount paid” for property “in
cash or other property.” Sec. 1.1012-1(a), Income Tax Regs.
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