William H. Maloof - Page 7

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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             
               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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