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An extensive body of caselaw establishes applicable
principles in various loan situations involving S corporations
and their shareholders. Fundamentally, a shareholder may obtain
or increase basis in an S corporation only if there is an
economic outlay on the part of the shareholder that leaves him or
her “‘poorer in a material sense.’” Perry v. Commissioner, 54
T.C. 1293, 1296 (1970) (quoting Horne v. Commissioner, 5 T.C.
250, 254 (1945)), affd. without published opinion 27 AFTR 2d
1464, 71-2 USTC par. 9502 (8th Cir. 1971); see also Maloof v.
Commissioner, 456 F.3d 645, 649-650 (6th Cir. 2006), affg. T.C.
Memo. 2005-75; 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. An economic outlay for this purpose includes a use of
funds for which the taxpayer is directly liable in a purchase of
S corporation shares, in an actual contribution of cash or
property by the shareholder to the S corporation, or in a
transaction that leaves the corporation indebted to the
shareholder. See Maloof v. Commissioner, supra at 649; Bergman
v. United States, 174 F.3d 928, 931-932 (8th Cir. 1999); Estate
of Leavitt v. Commissioner, supra at 423. Stated otherwise, the
shareholder must make an actual “‘investment’” in the entity,
Spencer v. Commissioner, 110 T.C. 62, 78-79 (1998) (quoting
legislative history at S. Rept. 1983, 85th Cong., 2d Sess.
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