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Loan to S corporation may not generate taxpayer basis.

Publication: The Tax Adviser
Publication Date: 01-OCT-02 		Format: Online - approximately 1130 words
Delivery: Immediate Online Access

Article Excerpt
In Oren, TC Memo 2002-172, the Tax Court held that a shareholder's loan to his S corporation, although evidenced by a promissory note, a cancelled check representing disbursement of the loan proceeds and subsequent interest payments, did not generate basis. As a result, the court sustained more than $5 million of assessed deficiencies for the three tax years at issue.

Background

Oren was the sole shareholder of Highway Sales (HS) and Highway Leasing (HL). He and his wife also owned approximately 61% of Dart Transit Company (Dart). The remaining Dart stock was owned by the Orens' children, either directly or through trusts. All of the companies were S corporations.

Although Dart was profitable for all years before the court, HL began to incur losses due to depreciation expenses. In December 1993, Dart lent $4 million to Oren, who lent $4 million to HL. HL then lent $4 million to Dart. The proceeds of each loan were distributed by check; each loan had a 7% annual interest rate, evidenced...

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