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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
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