- 20 -
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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