TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Sunday, September 25, 2005

Kristan on the S Corp Basis Hokey Pokey

Tax_court_7We previously blogged the Tax Court's decision in Brooks v. Commissioner, T.C. Memo. 2005-204 (8/25/05), which permitted an S Corp shareholder to increase the basis of his stock with a year-end loan which was repaid three days later.  We noted Joe Kristan's warning not to make too much of the result:  "Notwithstanding the taxpayer victory here, we normally wouldn't advise taxpayers to put large amounts of cash into an S corporation right before year-end to take losses and then withdraw it right after year-end."

Joe's warning was prescient, as the Tax Court last week in Kaplan v. Commissioner, T.C. Memo. 2005-218 (9/20/05), rejected an S Corp shareholder's attempt to pump up his basis with a year-end loan.  Joe notes:

It's not clear why the Tax Court decided the Brooks case differently; perhaps the shareholders loaned their own money to the corporation, rather than borrowed funds. Perhaps the IRS simply failed to raise the issue of whether there was substance to the loan.

THE MORAL?  You put your basis in, you pull your basis out, you put your basis in and you spread it all about, you do the hokey pokey and you turn the cash around, that's what it's all about. Oh, and don't count on short-term advances at year-end for S corporation basis.

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