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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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