While it is appropriate to scrutinize the validity of transactions between related parties, we see no reason why shareholders in two related S corporations should be prohibited from taking distributions of assets from one of their S corporations and investing those assets into another of their S corporations, in order to increase their bases in the latter.
Two years ago Congress, in a provision of the Balanced Budget Act known as Section 4507, in effect, prohibited doctors from treating Medicare-eligible patients outside the Medicare system.