Friday, April 14, 2017

Judgment against S Corporation Shareholder Didn't Create Basis

The taxpayer owned 50% of an S corporation that developed and sold residential and commercial real estate. The business relied heavily on debt financing, and virtually all of the loans were guaranteed by the taxpayer. When the corporation defaulted on the loans, the lenders sued the taxpayer on her guarantee, which resulted in liens against her property. To take advantage of S corporation losses, the taxpayer increased her stock basis by her prorata share of the unpaid judgment amounts. The taxpayer argued that a basis increase was justified because the judgment against her demonstrated an actual economic outlay. The Tax Court disagreed, concluding that the lenders initially didn't look to her as a source of repayment. A basis increase would have been appropriate only if the taxpayer had made payments on the guaranties or judgment. Rupert and Sandra Phillips , TC Memo 2017-61 (Tax Ct.).

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