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As a result of these adjustments, respondent determined that
the Salems had taxable income of $74,153 for 1990. As a result
of the adjustments to the Salems' income for 1990, respondent
determined that the net operating loss carryback to 1987 was zero
and increased the Salems' 1987 income by $127,465.
In a statutory notice of deficiency dated March 7, 1995,
issued to the Saxons, respondent determined that the loss from
SS&N was deductible to the extent of Mrs. Saxon's basis in her
interest in SS&N. Respondent further determined that her basis
as of January 1, 1990, was $29, and that the Saxons' taxable
income, therefore, was increased by $24,542.
OPINION
1. Claimed Net Operating Loss Deduction
Section 1366(d)(1) permits an S corporation shareholder to
deduct a proportionate share of the corporation's net operating
loss to the extent that the loss does not exceed the sum of the
adjusted basis of the shareholder's stock in the corporation and
any indebtedness of the S corporation to the shareholder.
Petitioners argue that the bank looked primarily to Mr.
Salem and Mrs. Saxon for repayment of the loans at issue.
Petitioners contend that the bank in substance made the loans to
Mr. Salem and Mrs. Saxon, and they in turn made loans to SS&N.
Petitioners conclude, therefore, that the loans constituted
indebtedness of the S corporation to its shareholders.
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