Phillip A. O'Bryon and Cyndie W. O'Bryon - Page 24

                                       - 24 -                                         
          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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