The rules for obtaining basis for S corporation loans are often best viewed as emphasizing form over substance. The fact that a shareholder might be economically “on the hook” for ultimate repayment of the debt will not generally impact whether that person will be able to claim the debt as basis. The shareholders of an S corporation ran into this issue in the case Messina et ux. et al. v. Commissioner, TC Memo 2017-213.
In this situation, the controlling shareholders of an S corporation formed another S corporation that loaned funds to a qualified S corporation subsidiary (QSUB) of the first S corporation. The shareholders then attempted to claim losses from the first S corporation by use those loans as additional basis in the corporation—a position the IRS and, ultimately, the Tax Court disagreed with.
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