- 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.Page: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Next
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