Related-party Transfers Didn’t Increase Basis in S Corporation Stock

Posted by Kim Chen on February 26th, 2018

The taxpayer, a real estate developer, held interests in various LLCs, partnerships, and S corporations (collectively, the “affiliate companies”). In 2004, he formed an S corporation to purchase a condominium complex in a bankruptcy sale. During 2004 through 2008, the affiliate companies regularly paid expenses, such as payroll costs, on behalf of the newly-formed S corporation. These transactions were recorded as an account payable, and a portion of that amount was allocated to the taxpayer as a shareholder loan. The taxpayer argued that the back-to-back affiliate company transactions increased his tax basis in the S corporation stock, which allowed him to carry back a substantial loss from 2008 to 2005. (A three-year carryback was allowed at that time for eligible small businesses.) The Tax Court disagreed, holding that no loan transactions were contemporaneously documented and that funds ran directly to the affiliate companies, not the taxpayer. Homero F. Meruelo, TC Memo 2018-16 (Tax Ct.).

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