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Memo. 1991-579; Creske v. Commissioner, T.C. Memo. 1990-318,
affd. 946 F.2d 43 (7th Cir. 1991).
Schedule E Losses
In the notice of deficiency, respondent disallowed
deductions for Schedule E losses in the amounts of $39,002 for
1992, $72,886 for 1993, and $93,116 for 1994 that primarily were
attributable to the O'Bryon Co. Respondent based the
determination on the fact that petitioners had failed to
establish that the losses were sustained or that, if such losses
were sustained, they were deductible losses under any provision
of the Code. In particular, petitioners failed to establish that
Phillip had sufficient basis in the S corporation stock to allow
the losses claimed.
During the audit, petitioners provided respondent with a
copy of the O'Bryon Co.'s filed tax return for 1992. Respondent
refused to accept the return as sufficient evidence of Phillip's
basis in the stock. During their settlement negotiations, in
order to establish Phillip's basis in the stock, petitioners
provided Mr. Fried with a copy of the O'Bryon Co.'s unfiled 1993
tax return. Although no evidence was produced to show how
Phillip's basis in the corporation was calculated, Mr. Fried
accepted both tax returns for the purpose of establishing
Phillip's basis in the company. Petitioners, however, failed to
provide any evidence to establish that they had sufficient basis
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