-31-
amount by decreasing the balance of the account Development
maintained for recording the amounts petitioner owed Development.
At the end of Development's 1990 fiscal year, Ricks and
Morrisett made journal entries in Development's books that
purported to transfer $417,978 of Development's indebtedness to
INI to petitioner.
On Schedule L of its 1990 and 1991 U.S. Income Tax Return
for an S Corporation (Form 1120S), Development reported that the
1990 ending balance and the 1991 beginning balance in the account
it maintained for loans that it received from petitioner was
$340,916.
Development incurred losses of $53,084, $163,487, and
$21,022 in 1989, 1990, and 1991, respectively. Petitioners
deducted these losses on their 1989, 1990 and 1991 returns.
Respondent determined that the balance in Development's
account for loans that it received from its shareholders was not
the result of an actual economic outlay; rather, the reported
amount was the cumulative result in 1990 of petitioner's alleged
assumptions of Development's indebtedness to petitioner's other
wholly owned corporations. Accordingly, respondent determined
that petitioner did not have sufficient basis in Development to
deduct the pass-through losses in 1990 and 1991.20 Specifically,
20
Respondent did not determine that Development did not incur
the losses.
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