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S Corporation Loss Limitations: The Tax Court Provides Potential Hope For Related Party Debt Restructurings, Francine J. Lipman

Francine J. Lipman

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. …