Sid Paul Ruckriegel - Page 25

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               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),            






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