- 25 - D. Discussion 1. The Economic Outlay Requirement Respondent’s principal argument is that petitioners failed to satisfy the requirement, referred to in a number of cases, e.g., Bergman v. United States, supra at 932; Hitchins v. Commissioner, 103 T.C. at 715, that an increased basis in an S corporation must entail an “actual economic outlay” by the shareholder taxpayer. In respondent’s view, that requirement is met only if the taxpayer invests in or lends to the S corporation his own funds, or funds borrowed from an unrelated party, to whom he is personally liable. We reject that view. As we made clear in Yates v. Commissioner, supra, and Culnen v. Commissioner, supra, the fact that funds lent to an S corporation originate with another entity owned or controlled by the shareholder of the S corporation does not preclude a finding that the loan to the S corporation constitutes an “actual economic outlay” by the shareholder. It is not unusual for an individual to conduct multiple businesses through multiple entities, some or all of which are passthrough entities (e.g., S corporations or partnerships). Nor is it unusual for one or more of those entities to be profitable and one or more to be unprofitable. Where the loss entity is an S corporation, we find no categorical rule, under section 1366(d)(1)(B), the regulations thereunder, see sec. 1.1366-2(a),Page: Previous 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 Next
Last modified: May 25, 2011