9
shareholder in two S corporations, A & L and Hennessey. In late
1979, the taxpayer assumed the liability of A & L to Hennessey.
A & L's books were adjusted with a debit to accounts payable and
a credit to notes payable. Hennessey's books were adjusted with
a debit to the taxpayer's drawing account and a credit to
accounts receivable. At the end of the year, the taxpayer's
drawing account was closed by debiting the taxpayer's
undistributed taxable income account in an amount including the
amount of the debt assumed. We concluded that the charge to the
taxpayer's drawing account was not an actual economic outlay
stating:
[The taxpayer's] bookkeeping maneuvers merely shifted,
on paper, the liability for prior loans. Hennessey's
debit to * * * [the taxpayer's] drawing account, and
its subsequent credit to that account and debit to * *
* [the taxpayer's] undistributed taxable income
account, do not reflect a current economic outlay
entitling * * * [the taxpayer] to increase his basis in
A & L. Although the entries in Hennessey's books
technically reduced * * * [the taxpayer's] book equity,
such entries could not, absent liquidation of
Hennessey, leave * * * [the taxpayer] "poorer in a
material sense." * * * [Shebester v. Commissioner,
supra; citation omitted.4]
Petitioners' reliance on Rev. Rul. 75-144, 1975-1 C.B. 277,
is misplaced. The Court of Appeals in Underwood v. Commissioner,
535 F.2d 309 (5th Cir. 1976), gave the ruling short shrift as
applied to situations such as is involved herein stating:
4 We took the same view in Wilson v. Commissioner, T.C. Memo.
1991-544, and Burnstein v. Commissioner, T.C. Memo. 1984-74.
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