4
Form 1120S. The following information was contained on GCC's
Forms 1120S for 1987 and 1988, respectively:
Beginning Ending
Year Item Balance Balance
1987 Trade notes and accounts receivable$476,374 $ 807,551
Accumulated adjustments account (125,063) 108,699
1988 Trade notes and accounts receivable563,051 1,849,370
Accumulated adjustments account (135,801) (172,891)
On Schedule E of their 1987 Federal income tax return,
petitioners: (1) Claimed a $169,602 passthrough loss from ABDC,
and (2) $241,424 of passthrough income from GCC.
Passthrough Loss
Section 1366(a) requires a taxpayer to take into account the
pro rata share of income, losses, and deductions of an S
corporation of which the taxpayer is a shareholder. The losses
and deductions taken into account are limited as follows:
Sec. 1366(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 * * *, and
(B) the shareholder's adjusted
basis of any indebtedness of the S
corporation to the shareholder
* * *.
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