-34-
petitioner's basis in his stock required in each year by section
1368 for distributions of property made to him must be taken into
account after the adjustments required by section 1367 for the
losses and deductions.
Economic Outlay
Respondent argues that actual economic outlay is required
before a shareholder in an S corporation may increase his basis
in the corporation for the corporation's indebtedness to the
shareholder; that in this case petitioner merely made paper
changes in the indebtedness between his corporations and himself;
that petitioner failed to show he actually paid out moneys on
behalf of Development; and that shifting of journal entries did
not leave petitioner in a materially poorer situation. We agree
with respondent.
In Underwood v. Commissioner, 63 T.C. 468 (1975), affd. 535
F.2d 309 (5th Cir. 1976), we faced a similar question. In that
case the taxpayers, husband and wife, were the sole shareholders
of two corporations operating cafeterias specializing in
barbecue. One of the corporations, Albuquerque, made an election
to be treated as an S corporation. The other corporation,
Lubbock, was a C corporation and was very profitable. Lubbock
made a series of loans to Albuquerque in return for demand notes
bearing 6-percent interest.
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