IRS had no basis to disallow losses
After the audit of an S corporation for the 2009 tax year, the IRS disallowed some corporate deductions and further disallowed the $24 million corporate loss allocated to the shareholders asserting that the shareholders lacked adequate basis. The shareholders retained us to dispute the IRS determination.
The shareholders claimed that they had adequate basis in the S corporation because they each loaned funds to the S corporation and that the loans created basis even though they were back-to-back loans. This means that the shareholders were the sole owners of both an S corporation and an LLC. The loan scenario was the following—the LLC received a bank loan and then loaned the funds to the shareholders who loaned the funds to the S corporation.
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