Burgess J.W. Raby & William L. Raby have published Shareholder Loans and Basis in S Corporations, also available on the Tax Analysts web site as Doc 2005-8277, 2005 TNT 76-109  Here is the Conclusion:

S corporation shareholders in need of basis to deduct losses should seriously consider either:

• contributing assets with sufficient tax basis to the corporation;
• or borrowing the money needed and making a contribution to capital or a loan.

The tax reality is that shareholders in S corporations that have never been C corporations face no more tax consequences when withdrawing equity from the corporation than when repaying debt. Thus, in the interests of keeping matters simple, we prefer capital contributions rather than loans unless there are nontax reasons — such as potential corporate insolvency or unwillingness of some shareholders to participate pro rata in what is being done — that might make a loan position more desirable than a shareholder position.

In any event, the type of meaningless paper swap involved in Perry is a nonstarter. A practitioner would be hard-pressed to sign a return taking losses on that basis, even with full disclosure, because it likely would be deemed a frivolous position. Selfe, on the other hand, holds out some hope for the situation in which the money goes from a third party directly to the S corporation but the shareholder is, in economic reality, the borrower, as in Bolding. Lenders seem to like those arrangements. From a tax planning perspective, however, the client should recognize that direct money transfers from third parties to the S corporation are much more likely to be challenged — and the outcome of those challenges is uncertain, as witness the Bolding loss in the Tax Court, while the cost of tax controversy can be substantial. Better that the shareholders create a clear paper trail showing that they borrowed the money personally and then contributed or loaned it to the S corporation. Most lenders will go that route if they would have gone the other, all other things, including collateral pledged, being the same.

Finally, there is the Oren situation. When multiple S corporations have substantially identical ownership, the problem of using profits in one to offset losses in another can be handled at the S corporation level by contributing 100 percent of the stock of the additional S corporations to one S corporation and making qualified S corporation subsidiary elections. When that has not been done, it is the path of least resistance to transfer funds from the entity that has or can get the cash to the entity that needs it. Oren illustrates that it is difficult to document those transfers in such a way as to give a shareholder tax basis in the loss entity. The tax practitioner should try to educate the client to resist the direct transfer temptation. Especially when shareholder basis is being sought to support losses, it is far better to take a cash distribution from one entity and then contribute or loan those amounts to the loss entity for which basis is needed.