A recent decision of the U.S. Court of Appeals for the Second Circuit (affirming the Tax Court)1 discusses a basic question of Federal corporate income tax law—whether or not contributions by a shareholder to the capital of a corporation constitute “income” to the corporation—in the context of ascertaining a contributing shareholder’s basis in loans made by the shareholder to an S corporation. The case also provides a cautionary example of a situation in which steps taken in one tax year, likely motivated by a desire to claim additional income tax deductions, combined with a novel reporting position in a following year intended to protect those deductions from a form of recapture, fostered controversy and litigation, but no ultimate benefit to the taxpayers.
‘Nathel v. Commissioner’
The taxpayers in Nathel were two brothers, Ira and Sheldon Nathel. Prior to 2001, the tax year at issue, each brother owned 25 percent of the stock of each of three S corporations—G&D Farms Inc. (G&D), Wishnatzki & Nathel Inc. (W&N), and Wishnatzki & Nathel of California Inc. (W&N CAL)—that were engaged in food distribution businesses in three states. The other 50 percent of the stock of each corporation was owned by another individual, Gary Wishnatzki (Gary).
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