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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
determination.
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