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corporation's accounting records treated the loans as loans from
the bank, not as loans from petitioners-shareholders. In
addition, Family Motels made the loan payments to the bank.
Neither petitioners nor Family Motels reported payments on the
loans made by Family Motels as constructive dividends, and Family
Motels deducted the interest paid on the loans.
From the time of incorporation, Family Motels suffered
significant losses. Petitioners increased their adjusted bases
in the indebtedness of Family Motels by the full amount of the
loans from Bank One and claimed deductions for the losses of
Family Motels under section 1366(a)(1)(B)3 in the amounts of
$296,236 and $432,007 for the taxable years 1989 and 1990,
respectively. Respondent determined that petitioners' bases in
the indebtedness of Family Motels did not include the loans from
Bank One and disallowed the losses claimed in 1989 and 1990 that
exceeded petitioners' adjusted bases in the stock and
indebtedness of Family Motels prior to the increase from the
loans.
OPINION
Under section 1366, S corporation shareholders may deduct
their pro rata share of losses and deductions of the S
3 Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years under
consideration, and all Rule references are to this Court's Rules
of Practice and Procedure.
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Last modified: May 25, 2011