One trick: An S corp shareholder who has agreed to guarantee a portion of a company s bank loan, though he may never have to pay out a dime, may still try to claim that theoretical indebtedness as a loss.
Under these proposed regulations, in the event a related party loan is converted into a loan between the shareholder and the loss S corporation for example, where the lending corporation distributes the receivable to the shareholder then the transaction would create loan basis to the shareholder.