8
1366(d) limits the total amount of deductions and losses that can
be passed through to the shareholder to the sum of the
shareholder's adjusted basis in the stock of the corporation and
the shareholder's adjusted basis in indebtedness owed by the
corporation to the shareholder.3 Respondent disallowed the
2(...continued)
(A) items of income (including tax exempt
income), loss, deduction, or credit the separate
treatment of which could affect the liability for
tax of any shareholder, and
(B) non-separately computed income or loss.
For purposes of the preceding sentence, the items referred
to in subparagraph (A) shall include amounts described in
paragraph (4) or (6) of section 702(a).
(2) Nonseparately Computed Income or Loss
Defined.--For purposes of this subchapter, the term
"nonseparately computed income or loss" means gross
income minus the deductions allowed to the corporation
under this chapter, determined by excluding all items
described in paragraph (1)(A).
* * * * * * *
3 Sec. 1366(d)(1) provides as follows:
(d) Special Rules For Losses and Deductions.--
(1) Cannot Exceed Shareholder's Basis in Stock and
Debt.--The aggregate amount of losses and deductions
taken into account by a shareholder under subsection
(a) for any taxable year shall not exceed the sum of--
(A) the adjusted basis of the shareholder's
stock in the S corporation (determined with
regard to paragraph (1) of section 1367(a) for the
taxable year), and
(B) the shareholder's adjusted basis of any
indebtedness of the S corporation to the
shareholder (determined without regard to any
(continued...)
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