Jeffrey M. Guerrero and Genedine R. Guerrero - Page 4




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               Mr. Guerrero reported a $64,491 loss for 1990.  He claimed a           
          $21,452 loss for 1991 and carried forward a $97,466 loss because            
          of a basis limitation.  For 1992, Mr. Guerrero claimed his 1991             
          Olympic carryover loss of $97,466 plus an additional 1992 loss              
          for a total of $106,487.                                                    
               Respondent determined that petitioners did not have                    
          sufficient bases to claim the 1992 losses from Olympic.  That               
          adjustment resulted in determinations of income tax deficiencies            
          for petitioners.  Respondent also determined that petitioners               
          were liable for accuracy-related penalties under section 6662(a).           
                                       OPINION                                        
          I.  Shareholder’s Basis                                                     
               Under section 1366, an S corporation shareholder may deduct            
          his pro rata share of losses (deductions) of the S corporation.             
          The losses, however, are limited to the sum of the adjusted basis           
          of the shareholder’s stock in the corporation and the adjusted              
          basis of any indebtedness of the corporation to the shareholder.            
          See sec. 1366(d)(1)(A) and (B).                                             
               In order to increase the basis in the indebtedness of an S             
          corporation, there must be an economic outlay on the part of the            
          shareholder.  See Estate of Leavitt v. Commissioner, 875 F.2d               
          420, 422 (4th Cir. 1989), affg. 90 T.C. 206 (1988); Brown v.                
          Commissioner, 706 F.2d 755, 756 (6th Cir. 1983), affg. T.C. Memo.           
          1981-608.  The economic outlay required under section                       






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