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B. Disagreement Between the Parties
To deduct his pro rata share of Wedgewood’s losses,
petitioner must prove that he had sufficient adjusted basis in
his S corporation investment (with respect to Wedgewood,
petitioner’s Wedgewood investment). Generally, cost defines an S
corporation shareholder’s initial basis in his S corporation
investment acquired for cash. See sec. 1012. Adjusted basis is
determined by making certain adjustments to cost basis. See sec.
1016. Section 1367 provides additional, special rules with
respect to adjusting basis in an S corporation investment. The
disagreement between the parties concerns only petitioner’s cost
basis in his Wedgewood investment. The parties disagree as to
whether petitioner’s cost basis in his Wedgewood investment
includes the various payments represented by the 46 checks, the
28 checks, the 6 checks, and the 8 payments (collectively, the
Wedgewood payments). Respondent denies that the Wedgewood
payments represent petitioner’s cost in obtaining his Wedgewood
investment. Respondent insists that the Wedgewood payments
constitute an investment by Culnen & Hamilton (not petitioner) in
Wedgewood.7 Petitioner insists that the Wedgewood payments
7 Although respondent denies that the Wedgewood payments
represent petitioner’s cost in obtaining his Wedgewood
investment, respondent agrees with our finding that, for 1987
through 1990, petitioner’s percentage ownership in Wedgewood
increased from 39.48 to 73 percent. Petitioner testified
(continued...)
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Last modified: May 25, 2011