(taxpayer invested in cell phone industry and obtained FCC licenses to serve rural areas; taxpayer formed S corporation and contributed license to it in exchange for stock; another S corporation created that acquired more licenses and transferred them to LLCs in exchange for LLC assuming debt for licenses; S corporation had no income except that allocated to it from first S corporation; all entities went bankrupt and taxpayer claimed it had sufficient basis to deduct losses because money was borrowed from one S corporation and loaned to another S corporation; IRS disallowed flow-through losses on basis that transfer of funds was not first loaned from the S corporation to the taxpayers and then to the other S corporation; step-transaction doctrine applied; payments recharacterized as loans only via year-end reclassifying journal entries and other documents; allocation of purchase price of equipment to depreciable assets not correct and that some entities not actively engaged in trade or business and, thus, no amortization for deductions related to FCC licenses; on further review, court affirmed; appellate court determined that taxpayer had insufficient debt basis in S corp. to allow pass-through losses because taxpayer served merely as conduit for loans and there never was any direct indebtedness to the taxpayer; business expense deductions also disallowed because taxpayer did not operate any networks and, thus, not actively conducting business; relatedly, no amortization deductions under I.R.C. Sec. 197 for FCC licenses that taxpayer acquired because no active trade or business).
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