Arun and Asmita Bhatia - Page 5

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          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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