Allen C. Chamberlin and Martha L. Chamberlin - Page 10

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               In the capacity of a creditor, a taxpayer realizes a loss              
          from a loan made to a corporation that becomes worthless and                
          uncollectible.  The amount of loss from a worthless loan is the             
          adjusted basis of the promissory note representing the debt.  See           
          sec. 166.  The adjusted basis of a note equals the face amount of           
          the debt minus any principal paid back by the debtor corporation.           
          See sec. 1.166-1, 1.1011-1, Income Tax Regs.  Where a taxpayer              
          borrows money from a third party and contributes or reloans the             
          proceeds to a corporation, the taxpayer includes the proceeds               
          transferred to the corporation in the basis of his stock in the             
          corporation or in the promissory note representing the debt.  The           
          increase in basis occurs regardless of whether the taxpayer                 
          repays the third-party loan.  See Brenner v. Commissioner, 62               
          T.C. 878, 883 (1974).                                                       
                                  Amount of Losses                                    
               Petitioners claim to have suffered a loss in the amount of             
          $1,255,400 from petitioner’s dealings with Pharmacare.                      
          Respondent concedes that a loss was incurred by petitioners in              
          the amount of $414,000 but contests the occurrence of the                   
          following transfers, which petitioners claim were loans made to             

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Last modified: May 25, 2011