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funds. Vebeliunas was found guilty on virtually all of those
counts.
OPINION
I. Introduction
Under section 1366, a shareholder in an S corporation is
entitled to take into account his or her pro rata share of the
corporation's losses. See sec. 1366(a). Respondent has conceded
that Good Shepherd is an S corporation, and we must determine the
extent, if any, of Good Shepherd's allowable losses for 1986
through 1988. We must also determine whether petitioners are
liable for certain additions to tax.
In support of her notices of deficiency that underlie these
cases, respondent explained her adjustments with regard to Good
Shepherd for 1986 through 1988 as follows:
It is determined that the losses claimed on your income
tax returns from Good Shepherd Home, Inc. are
disallowed in full because you failed to establish:
1. That the losses were incurred in a trade or
business for the production of income.
2. That the S-corporation was formed, entered into,
operated or conducted for the purpose of making a
profit, rather than for tax avoidance.
3. That the S-corporation status is valid.
Alternatively, if it is established that your S-
corporation is valid, you have not verified
expenses allegedly giving rise to the losses were
ever paid or incurred.
In the petitions, petitioners assign error to respondent's
adjustments and to her determinations of additions to tax.
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