S Corporation Loss Limitations: The Tax Court Provides Potential Hope for Related Party Debt Restructurings

Abstract:     
This article describes the significant S corporation shareholder basis limitations on pass-through losses. The article focuses on the Internal Revenue Service's (Service) and the courts' strict scrutiny and denial of S corporation shareholder basis when related party debt has been restructured to increase the amount of allowable pass-through losses. The Tax Court, in its recent decision in Culnen v. Commissioner, 79 T.C.M. (CCH) 1933 (2000), rev'd on other grounds, 89 A.F.T.R.2D (RIA) 383 (3d Cir. 2002), has made an affirmative statement that it will not automatically disallow an S corporation shareholder's basis when borrowed funds originate with a related entity. The court's analysis of the requirements for shareholder basis, however, is inconsistent with its analysis in prior decisions and the Service's absolute denial of basis with respect to related party debt restructurings. This article attempts to analyze and reconcile the Tax Court's opinion in Culnen, and Yates v. Commissioner, 82 T.C.M. (CCH) 805 (2001), a subsequent complementary case, with the preceding case law.

Number of Pages in PDF File: 37

Keywords: S corporation, loss limitations, related party, debt restructurings

JEL Classification: H25, K34

Accepted Paper Series