7
note 2, was enacted, referring initially to the following
statement in the legislative history:
The amount of the net operating loss apportioned
to any shareholder pursuant to the above rule is
limited under section 1374(c)(2) to the adjusted basis
of the shareholder's investment in the corporation;
that is, to the adjusted basis of the stock in the
corporation owned by the shareholder and the adjusted
basis of any indebtedness of the corporation to the
shareholder. * * * [S. Rept. 1983, 85th Cong., 2d
Sess. (1958), 1958-3 C.B. 922, 1141; emphasis added.]
The Court of Appeals then went on to conclude:
In the transaction at issue in this case, the
taxpayers in 1967 merely exchanged demand notes between
themselves and their wholly owned corporation; they
advanced no funds to either Lubbock or Albuquerque.
Neither at the time of the transaction, nor at any
other time prior to or during 1969 was it clear that
the taxpayers would ever make a demand upon themselves,
through Lubbock, for payment of their note. Hence, as
in the guaranty situation, until they actually paid
their debt to Lubbock in 1970 the taxpayers had made no
additional investment in Albuquerque that would
increase their adjusted basis in an indebtedness of
Albuquerque to them within the meaning of section
1374(c)(2)(B). * * * [Underwood v. Commissioner, 535
F.2d at 312; fn. refs. omitted.]
Petitioners attempt to distinguish the instant situation
from that which existed in Underwood, by claiming that subsequent
"distributions, extinguishments of debt, reductions in tax bases
* * * [and] payments of additional taxes in subsequent years"
that exist in this case did not exist in Underwood. This
argument focuses on the reduction in GCC's trade notes and
accounts receivables and accumulated adjustment accounts shown on
its 1987 and 1988 Federal income tax returns and on the parties'
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