Charles E. and Jacquelyn Yates - Page 6

                                        - 6 -                                         
          1994, were gifts from Mr. Yates to Mrs. Yates that increased her            
          basis in Fox Trot.  We agree with petitioners.                              
               Pursuant to section 1366(a), an S corporation shareholder is           
          allocated a pro rata share of its income and losses, which may be           
          reported on such shareholder’s individual income tax return.                
          Pursuant to section 1366(d), a shareholder, however, may deduct S           
          corporation losses only to the extent of such shareholder’s                 
          basis.  Basis in an S corporation is acquired by contributing               
          capital or lending money to the corporation.  See sec. 1366(d).             
               Generally, a shareholder must make an actual economic outlay           
          to increase his basis in an S corporation.  See Pugh v.                     
          Commissioner, 213 F.3d 1324, 1330 (11th Cir. 2000), affg. T.C.              
          Memo. 1999-38.                                                              
               Because of Mr. Yates’ frequent unavailability, Adena made              
          direct transfers from 1993 through October 15, 1995, to or for              
          Fox Trot.  During 1993 through October 1, 1994, Mr. Adams                   
          typically made temporary postings, until he determined the                  
          correct treatment of the transfers.                                         
               Petitioners paid personal expenses from the Adena account              
          and used Adena as an incorporated pocketbook.  To the extent                
          transfers from Adena were contributions or loans to Fox Trot from           
          its shareholder (i.e., Mr. or Mrs. Yates) the shareholder’s basis           
          increased.  Mr. Yates transferred money he held in Adena’s                  
          account to Fox Trot.  Further, for transfers from January 1                 

Page:  Previous  1  2  3  4  5  6  7  Next

Last modified: May 25, 2011