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Petitioners made contributions to capital of ASK Properties of
$18,348 in 1993 and $11,136 in 1994.
Respondent disallowed the flow-through losses to petitioners
to the extent the losses exceed petitioners’ basis in stock
without consideration of the loan.
OPINION
Petitioners bear the burden of showing error in the
determinations of respondent in the notice of deficiency. See
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Petitioners argue that, under principles of equity, the
corporation should be disregarded, and the business entity should
be taxed as a partnership. Respondent contends that the form and
substance of the business entity is that of an S corporation, and
it should, therefore, be taxed as an S corporation.
Shareholders are only entitled to claim losses and
deductions to the extent that they do not exceed the sum of their
adjusted basis in stock of an S corporation. See sec.
1366(d)(1). If a business entity is taxed as an S corporation, a
loan obligation of the corporation to a third party, personally
guaranteed by taxpayers as shareholders, generally would not be
includable in shareholders’ basis in stock of an S corporation.
See Estate of Leavitt, 90 T.C. 206, 216 (1988), affd. 875 F.2d
420 (4th Cir. 1989). A mere promise to advance money to a
corporation if certain events occur to trigger a guaranty is not
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