Robert J. and Anne L. Wilson - Page 23

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               The basis for determining the amount of a loss is the                  
          adjusted basis for determining loss on a sale or exchange.  Sec.            
          165(b); sec. 1.165-1(c), Income Tax Regs.  Generally, the                   
          adjusted basis for determining gain or loss is the cost of such             
          property.  Secs. 1011 and 1012.  It is generally accepted that an           
          income item cannot be transformed into a capital asset, having a            
          cost basis, until it is first included in income.  Bryan v.                 
          Commissioner, 16 T.C. 972, 980-981 (1951); Gorman v.                        
          Commissioner, T.C. Memo. 1986-344.  Thus, when a dividend is                
          received and reinvested, the taxpayer's basis will include the              
          amount of the dividend only to the extent that the dividend was             
          included in income.  See Gorman v. Commissioner, supra.                     
               Petitioners did not report the receipt of the $2,104.66                
          distribution from the stock fund on their 1989 income tax return.           
          Accordingly, they cannot claim that this amount was included in             
          their stock fund basis.  Therefore, we sustain respondent's                 

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