5
The share of any S corporation loss in excess of the taxpayer's
adjusted basis, under section 1366(d)(1)(A) and (B), is carried
over indefinitely to the succeeding years. Sec. 1366(d)(2).
Prior cases have established certain principles in respect
of the application of the indebtedness limitation under section
1366(d)(1)(B). See Eustice & Kuntz, Federal Income Taxation of S
Corporations, sec. 9.05 at 9-47 through 9-54 (3d ed. 1993).2
Most important to our analysis is the requirement that there be
an actual economic outlay by the taxpayer. See Underwood v.
Commissioner, 535 F.2d 309 (5th Cir. 1976), affg. 63 T.C. 468
(1975); Hitchins v. Commissioner, 103 T.C. 711 (1994).3
Petitioner contends that, by entering into the assumption
agreement, he is entitled to increase his basis in ABDC in an
amount corresponding to the amount of the obligation he assumed.
Respondent counters that the assumption agreement was a "scheme"
by which petitioner attempted to increase his basis in ABDC in
order to enable him to utilize its net operating losses and that
petitioner did not make the economic outlay required by the
decided cases. Consequently, respondent asserts that petitioner
2 Many of the cases involve tax years beginning prior to
Dec. 31, 1982, to which sec. 1374(c)(2) applied. Sec. 1366(d)(1)
replaced sec. 1374(c)(2) without significant change.
3 See also Wilson v. Commissioner, T.C. Memo. 1991-544; Griffith
v. Commissioner, T.C. Memo. 1988-445; Shebester v. Commissioner,
T.C. Memo. 1987-246.
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