Daniel J. Culnen - Page 10




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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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