"ABC S-corporate recorded a loan to the 100% shareholder to pay estimated taxes"

It doesn't matter what the person did with the funds.

"dividends are paid for the remaining tax due to the shareholder"

S Corp has no dividends provision, and there is no "tax due" to anyone. Were you posting these payouts as if that is Expense?

What you have is, someone trying to justify a Distribution.

"and to pay off the loan which paid the est taxes."

You don't give them more money; you write off that loaned balance as a distribution.

"With the 2020 economy tanking, the taxpayer now has a $500,000 loss."

Was there a loan document signed? Were any payments ever made? Was interest imputed? Or is there not really a loan involved here?