Academic journal article Journal of Accountancy

When Payments to an S Corporation Don't Create Basis

Academic journal article Journal of Accountancy

When Payments to an S Corporation Don't Create Basis

Article excerpt

Do payments, either direct or indirect, to a subchapter S corporation always create an increase in the taxpayer's basis? The Tax Court recently decided that they do not.

Sid and Al Ruckriegel were 50% shareholders in Sidal Inc., a subchapter S corporation, set up in Indiana. They were also 50% partners in Paulan Properties Partnership. Sidal incurred ordinary losses in 1999 and 2000. Between 1997 and 2000 Paulan transferred approximately $4 million directly and $2 million in bank loans indirectly to Sidal. The petitioners argued that Paulan was acting as their agent and that their basis in Sidal should be increased by $6 million. Because the petitioners were not the direct source of the funds, the IRS disagreed and assessed combined tax deficiencies of $220,000 and $250,000 for 1999 and 2000, respectively The Ruckriegels petitioned the Tax Court.

Result. For the IRS as to the direct payments, for the Ruckriegels as to the indirect payments. The Ruckriegels argued that the payments were in substance back-to-back loans through them that had created a debtor-creditor relationship. They also claimed that, under Indiana law, intent governed whether a debtor-creditor relationship existed, and that board of directors' minutes, promissory notes and accounting entries, along with the "incorporated checkbook" concept, as discussed in Yates and Culnen, provided evidence that this was their intent. …

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