Arun and Asmita Bhatia - Page 4

                                          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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