Thomas F. and Therese Grojean - Page 11

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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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