Joe Kristan has a detailed analysis of TAM 200619021 (released 5/12/2006) on a taxpayer’s unsuccessful attempt to use loans to her S Corp to generate sufficient basis to deduct her losses. Joe’s advice:

If you need basis in your S corporation and you don’t have cash to contribute yourself, it’s best to borrow from a third-party lender, like a bank. If you need to get the funds from a related entity, like another corporation or partnership, take the funds as a distribution, rather than a loan, and don’t let the S corporation send the money right back to where it started.