Timothy J. and Joan M. Miller - Page 20

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          acquires basis with respect to indebtedness.  See Hitchins v.               
          Commissioner, 103 T.C. 711, 715 (1994); Grojean v. Commissioner,            
          T.C. Memo. 1999-425, affd. 248 F.3d 572 (7th Cir. 2001).  First, a          
          shareholder must make an actual economic outlay.  Underwood v.              
          Commissioner, 535 F.2d 309 (5th Cir. 1976), affg. 63 T.C. 468               
          (1975); Perry v. Commissioner, 54 T.C. 1293, 1296 (1970), affd. 27          
          AFTR 2d 71-1464, 71-2 USTC par. 9502 (8th Cir. 1971).15  The                
          economic outlay must leave the taxpayer "poorer in a material               
          sense" in order for its bona fides to be respected.  Perry v.               
          Commissioner, supra at 1296; see also Bergman v. United States,             
          174 F.3d 928, 933 (8th Cir. 1999).16                                        
               Next, the S corporation's indebtedness must run directly to            
          the shareholder; an indebtedness to a passthrough entity that               


               15 The economic outlay requirement stems from the concept              
          that an S corporation shareholder should be entitled to basis to            
          the extent of his investment in the S corporation.  S. Rept.                
          1983, 85th Cong., 2d Sess. 219-220 (1958), 1958-3 C.B. 922, 1141            
          ("The amount of the net operating loss apportioned to any                   
          shareholder * * * is limited under [former] section 1374(c)(2)              
          [the predecessor of sec. 1366(d)] to the adjusted basis of the              
          shareholder’s investment in the corporation; that is, to the                
          adjusted basis of the stock in the corporation owned by the                 
          shareholder and the adjusted basis of any indebtedness of the               
          corporation to the shareholder." (emphasis added)); see also                
          Perry v. Commissioner, 54 T.C. 1293, 1296 (1970) (concluding that           
          the word "investment" indicated an intent to limit a                        
          shareholder’s basis to that shareholder’s "actual economic                  
          outlay").                                                                   
               16 As we noted in Perry, the "poorer in a material sense"              
          standard for testing an economic outlay merely restates the well-           
          settled predicate for allowing any deduction.  Perry v.                     
          Commissioner, supra at 1296.                                                




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