Robert H. and Mildred M. Bettisworth - Page 4




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            forward.3  In 1994, petitioners used an NOL carryover of $154,971.4                        
                  In the notice of deficiency, respondent determined that the                          
            use of Narwhal’s excluded COD income to increase the basis of                              
            petitioner’s stock was improper and consequently there was                                 
            insufficient basis for petitioners to use the NOL carryovers.                              
            Respondent made other adjustments to petitioners’ 1994 return based                        
            on the disallowance of the NOL’s.  The parties agree that these                            
            adjustments are computational and turn on our resolution of the NOL                        
            issue.                                                                                     
            Discussion                                                                                 
                  Section 1366(d) provides that the aggregate amount of losses                         
            and deductions taken into account by a shareholder of an S                                 
            corporation cannot exceed the sum of:  (1) The adjusted basis of                           
            the shareholder’s stock in the S corporation; and (2) the                                  
            shareholder’s adjusted basis of any indebtedness of the S                                  
            corporation to the shareholder.  Petitioners maintain that they are                        
            entitled to increase the basis in their Narwhal stock by their                             
            distributive share of COD income and accordingly should be allowed                         
            to deduct certain NOL’s.                                                                   
                  Petitioners make no attempt to distinguish their case from                           

                  3     Petitioners carried back a total of $85,654 in                                 
            suspended losses to 1990, 1991, and 1992.  The remaining $991,995                          
            was then carried forward.                                                                  
                  4     Petitioners claimed a $164,197 NOL carryover on their                          
            amended 1994 return.  We are unable to account for this                                    
            discrepancy.                                                                               





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