Frederick H. Jackson III and Pamela S. Jackson - Page 14

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          (3) the guarantors contributed such sums to the capital of the              
          corporation, and (4) such contribution by petitioner resulted in            
          an increase in petitioner’s adjusted basis in his stock under               
          section 1012.5  Therefore, argue petitioners, petitioner had an             
          adequate basis under section 1366(d)(1)(A) to allow him to deduct           
          the losses.  Petitioners specifically disclaim that they are                
          asking us to find that the guaranty increased any indebtedness of           
          the corporation to petitioner (which would bring into operation             
          section 1366(d)(1)(B)).                                                     

               5  Petitioners do not cite, but apparently rely on, sec.               
          1.118-1, Income Tax Regs., to establish a cost basis in                     
          petitioner’s shares on account of such deemed capital                       
          contribution.  In pertinent part, sec. 1.118-1, Income Tax Regs.,           
               Contributions to the capital of a corporation.-–* * *                  
               if a corporation requires additional funds for                         
               conducting its business and obtains such funds through                 
               voluntary pro rata payments by its shareholders, the                   
               amounts so received being credited to its surplus                      
               account or to a special account, such amounts do not                   
               constitute income, although there is no increase in the                
               outstanding shares of stock of the corporation.  In                    
               such a case the payments are in the nature of                          
               assessments upon, and represent an additional price                    
               paid for, the shares of stock held by the individual                   
               shareholders, and will be treated as an addition to and                
               as a part of the operating capital of the company.                     
               * * *  [Emphasis added.]                                               

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