In the case of Meruelo v. Commissioner, TC Memo 2018-16 a taxpayer argued that an IRS change in regulations related to S corporations loans made in 2014 meant that he did not need to show he was actually economically worse off following a purported loan to obtain basis for deducting losses.  Unfortunately for the taxpayer, the Tax Court ruled that the new regulations did not remove the requirement that the taxpayer show he/she is economically worse off to obtain basis in what the taxpayer claims is a loan from him/her to the S corporation.

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The Courts generally look to an “actual economic outlay” that makes the taxpayer poorer in some objective fashion to allow the taxpayer to claim basis in debt for an S corporation.  In the case of Phillips v. Commissioner, T.C. Memo 2017-61, the taxpayer argued that the fact that judgments had been entered against her should give her the right to treat a portion of the debt as basis for claiming losses.

The taxpayer owned 50% of an S corporation that fell on hard times during the real estate crisis, defaulting on several loans which had been guaranteed by Sandra.  The banks sued to collect on the guarantees and obtain judgments against Sandra.  However, Sandra had not actually made any payments on the debts.

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