Frederick H. Jackson III and Pamela S. Jackson - Page 9

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          for the years in question, petitioner’s adjusted basis in his               
          shares of stock of the corporation was zero.                                
          I.  Introduction                                                            
               We must determine whether petitioner may deduct his pro rata           
          share of certain losses of the corporation, an S corporation.               
          The parties agree that the answer to that question turns on                 
          whether petitioner had more than a zero adjusted basis in his               
          shares of the corporation (the shares).  Petitioners’ only                  
          argument for an adjusted basis in excess of zero is that, on                
          account of the guaranty, petitioner should be viewed as having              
          made a capital contribution to the corporation.                             
          II.  Provisions of the Code                                                 
               In pertinent part, section 1366(a) provides that a                     
          shareholder of an S corporation may deduct his pro rata share of            
          the S corporation’s loss, subject to the limitations contained in           
          section 1366(d)(1).                                                         
               Section 1366(d)(1) provides:                                           
               Cannot Exceed Shareholder’s Basis in Stock and Debt.                   
               -–The aggregate amount of losses and deductions taken                  
               into account by a shareholder under subsection (a) for                 
               any taxable year shall not exceed the sum of--                         
                    (A) the adjusted basis of the shareholder’s                       
                    stock in the S corporation * * *, and                             
                    (B) the shareholder’s adjusted basis of any                       
                    indebtedness of the S corporation to the                          
                    shareholder * * *                                                 

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