In Maloof v. Commissioner, T.C. Memo 2005-75, the Tax Court this week held that the taxpayer could not increase his adjusted basis in an S corp by a $4 million bank loan to the S corp.  The Tax & Business Law Commentary Blog picks up the story:

In Maloof, the taxpayer was a sole shareholder of an S corporation that suffered a long succession of tax losses. Because his ability to use the losses of the corporation were limited to his basis in the corporation’s stock, the taxpayer attempted to increase his basis in the stock by including in basis $4 million in bank loans made to the corporation. Apparently, except for a pledge of his stock in the corporation, the taxpayer was not at risk with respect to the loans. The opinion reads like the Children’s Goldenbook of S Corporation Taxation with the Court walking through fairly basic principles of S corporation taxation. The taxpayer’s positions were so adverse to established law that I’m surprised that there was no mention of possible sanctions for taking a frivolous position. (My favorite ludicrous position taken by the taxpayer is that he was a resident of Florida and thus the precedent of the 11th Circuit applied to the case. Why was he a resident of Florida: He lived with his mother, not his wife, who lives in Ohio. Note to Counsel: Your client’s name is "Maloof" not "Oedipus.") The case is instructive on one point: LLCs classified as partnerships or as disregarded entities have benefits over S corporations. Were the company an LLC classified as a partnership or a disregarded entity, the taxpayer would have obtained the benefits he sought. And, he wouldn’t have had to run home to momma.