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and deductions taken into account are limited by section 1366(d)
as follows:
(d) Special Rules for Losses and Deductions.--
(1) Cannot exceed shareholder's basis in stock and
debt.--The aggregate amount of losses and deductions
taken into account by a shareholder under subsection
(a) for any taxable year shall not exceed the sum of–
(A) the adjusted basis of the
shareholder's stock in the S corporation
* * *, and
(B) the shareholder's adjusted basis of
any indebtedness of the S corporation to the
shareholder * * *.
Any S corporation loss that exceeds a taxpayer's adjusted basis
in his or her stock and debt is carried over indefinitely to the
succeeding years. See sec. 1366(d)(2).
Prior cases have established certain principles in respect
of the application of the indebtedness limitation under section
1366(d)(1)(B). First, a taxpayer must make an actual economic
outlay. See Underwood v. Commissioner, 535 F.2d 309 (5th Cir.
1976), affg. 63 T.C. 468 (1975); Hitchins v. Commissioner, 103
T.C. 711 (1994). Second, the S corporation’s indebtedness must
run directly to the shareholder; an indebtedness to a passthrough
entity that advanced the funds and is closely related to the
taxpayer does not satisfy the statutory requirements. See
Frankel v. Commissioner, 61 T.C. 343 (1973), affd. without
published opinion 506 F.2d 1051 (3d Cir. 1974); Prashker v.
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Last modified: May 25, 2011