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2000-355; Parrish v. Commissioner, 168 F.3d 1098, 1102 (8th Cir.
1999), affg. T.C. Memo. 1997-474.
Section 1366(d) provides:
SEC. 1366. PASS-THRU OF ITEMS TO SHAREHOLDERS.
* * * * * * *
(d) Special Rules for Losses and Deductions.--
(1) 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 (determined with
regard to paragraph (1) of section 1367(a) for
the taxable year), and
(B) the shareholder’s adjusted basis of any
indebtedness of the S corporation to the
shareholder (determined without regard to any
adjustment under paragraph (2) of section
1367(b) for the taxable year).
The legislative history of section 1366(d) indicates that losses
are deductible only to the extent of one’s “investment” in the S
corporation, which includes cash outlays as well as loans to the
corporation from the shareholder. The Senate Finance Committee
Report states:
The amount of the net operating loss apportioned
to any shareholder pursuant to the above rule is
limited under section 1374(c)(2) [a predecessor of
section 1366(d)] to the adjusted basis of the
shareholder’s investment in the corporation; that is,
to the adjusted basis of the stock in the corporation
owned by the shareholder and the adjusted basis of any
indebtedness of the corporation to the shareholder. * *
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