- 32 -
petitioners to acquire tax bases in Sidal; i.e., for tax
minimization or avoidance purposes. This case does not involve a
brief, circular flow of funds beginning and ending with the
original lender, the sole purpose of which is to generate a tax
basis in an S corporation. See Kaplan v. Commissioner, T.C.
Memo. 2005-218, and Oren v. Commissioner, T.C. Memo. 2002-172,
affd. 357 F.3d 854 (8th Cir. 2004), in both of which we found
that such an arrangement had no economic substance and,
therefore, did not involve the actual economic outlay required to
create a basis in the S corporation. The loans to Sidal had a
valid business purpose; i.e., to provide working capital for the
operation and expansion of Sidal’s business. Although the back-
to-back loan structure was adopted in order to achieve tax bases
for petitioners in Sidal equal in amount to the loans, that is a
permissible motivation for that structure. See Helvering v.
Gregory, 69 F.2d 809, 810 (2d Cir. 1934) (“Anyone may so arrange
his affairs that his taxes shall be as low as possible”), affd.
293 U.S. 465 (1935). See also Gilday v. Commissioner, supra, in
which we sustained the taxpayer-shareholder’s loan basis in an S
corporation despite the parties’ agreement that the transaction
which gave rise to that basis “was motivated by tax
considerations.”
It is necessary, however, that petitioners’ intent to
establish a back-to-back loan structure in connection with the
Page: Previous 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 NextLast modified: May 25, 2011