6
is precluded from taking the ABDC net operating loss in 1987
because his basis in ABDC was zero.
In Underwood v. Commissioner, supra, the taxpayers were the
sole shareholders of two corporations engaged in the retail
barbecue business. One of the corporations, an S corporation,
was consistently unprofitable. The other corporation, a C
corporation, was consistently profitable. Over the course of
approximately 22 months, the C corporation had made loans
totaling $110,000 to the S corporation, which were evidenced by a
series of promissory notes. The taxpayers' accountant informed
the taxpayers that their losses from the S corporation would
exceed their adjusted basis in the S corporation and advised them
to increase their basis in the S corporation so they could
utilize the losses. In an arrangement, not unlike the one
herein, the C corporation surrendered the notes of the S
corporation to the S corporation, the taxpayers substituted their
personal note to the C corporation, and the S corporation gave
its demand note to the taxpayers. The Court of Appeals for the
Fifth Circuit, affirming the decision of this Court, determined
that the taxpayers were not entitled to increase their basis in
the S corporation as a result of the arrangement.
In reaching its decision, the Court of Appeals for the Fifth
Circuit discussed the focus of Congress at the time section
1374(c)(2)(B), the predecessor to section 1366(d)(1), see supra
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