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Any losses or deductions disallowed for any taxable year by
section 1366(d)(1) are treated as incurred by the S corporation
in the succeeding taxable year with respect to that shareholder.
Sec. 1366(d)(2). Accordingly, subject to the section 1366(d)(1)
limitation, Michael, Jody, and David are entitled to their pro
rata shares of the corporation's losses.3
Section 1368 provides that, in the case of an S corporation
which has no accumulated earnings and profits, a distribution of
property made with respect to its stock is treated as gain from
the sale or exchange of property to the extent the amount of the
distribution exceeds the adjusted basis of the stock. Sec.
1368(a) and (b).
Taking into account the total amounts paid to or on behalf
of Michael, Jody, and David during the taxable years in issue,
supra p. 5, and the portions of such amounts which we have held
to be employee wages, supra p. 10, we find that the amounts
distributed to them with respect to their stock are as follows:
Year Michael Jody David
1992 $37,526.53 --- $25,784.81
1993 12,515.43 $2,519 ---
1994 4,082.10 --- ---
3 In addition, we find that Michael, Jody, and David are
entitled to deductions for their pro rata shares of the
corporation's separately stated charitable contributions in the
amounts of $3,788, $3,270, and $2,370, for 1992, 1993, and 1994,
respectively. Secs. 1363(b)(1), 1366(a)(1); see sec. 702(a)(4).
Michael, Jody, and David concede that they must include in their
gross income their pro rata shares of the corporation's
separately stated interest income, as determined by respondent.
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