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deductions. See sec. 1366(a). The aggregate amount of
deductions and losses that the taxpayer may take into account
generally is limited, however, to the sum of: (1) The adjusted
basis of the shareholder’s stock in the S corporation, and (2)
the shareholder’s adjusted basis in any indebtedness owed by the
corporation to the shareholder. See sec. 1366(d)(1).16
Petitioners have failed to establish what balance, if any,
was outstanding with respect to the line of credit, or
enhancements thereof, between AMI and Towers Development as of
each taxable year in question. AMI was to make loan
disbursements to Towers Development in accordance with a line of
credit construction loan agreement, but petitioners have put into
evidence neither the line of credit construction loan agreement
nor other evidence that would credibly establish the amounts and
dates of disbursements made by AMI under the line of credit.
AMI extended the line of credit to Towers Development in May
1985. One of petitioners’ witnesses, James Guerino (Guerino), a
16 For the years in issue, the regulations provide that
adjustments to the basis of a shareholder’s stock and to the
basis of indebtedness of an S corporation to a shareholder “must
be determined in a reasonable manner, taking into account the
statute and the legislative history.” Sec. 1.1367-3, Income Tax
Regs. For the years in issue, return positions are deemed
reasonable if consistent with the regulatory rule, expressly
applicable to taxable years of corporations beginning on or after
Jan. 1, 1994, that adjustments to the basis of a shareholder’s
stock and to the basis of indebtedness are generally determined
as of the close of the corporation’s taxable year and are
generally effective as of that date. See secs. 1.1367-1(d)(1),
1.1367-2(d)(1), and 1.1367-3, Income Tax Regs.
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