When business activities are conducted through two or more corporations under common ownership, one such corporation will frequently be funded, directly or indirectly, with cash from the other. The manner in which funds are transferred from the corporation with available cash (ProfitCo) to the corporation with cash needs (LossCo) can affect the tax treatment of the corporations and their shareholders.

If the corporations involved are S corporations, the preferred structure for the flow of funds may be influenced by IRC section 1366(d), which generally limits the pass-through of losses to an S corporation shareholder to the aggregate of the shareholder’s basis in stock of the corporation and the shareholder’s basis in loans made by the shareholder to the corporation. If funds are withdrawn from ProfitCo as a distribution with respect to stock and then contributed to LossCo by the shareholder, the amounts so contributed will be taken into account in determining the extent of losses of LossCo that may be taken into account by the shareholder.