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OPINION
I. Basis
Petitioners claim an entitlement to carry back and deduct
for 1994 their proportionate share of Ram’s losses from 1995 and
1996. A shareholder of an S corporation may take into account
his or her pro rata share of the S corporation’s loss. Sec.
1366(a)(1). A shareholder’s deduction of that loss, however, is
limited to the amount that equals his or her adjusted basis in:
(1) The S corporation’s stock and (2) any indebtedness of the S
corporation to the shareholder (collectively, S corporation
investment). Sec. 1366(d)(1). Any loss so limited and thereby
disallowed in a particular taxable year may be carried forward
indefinitely. Sec. 1366(d)(2). To deduct their pro rata share
of Ram’s losses, petitioners must prove that they had sufficient
adjusted basis in their S corporation investment in Ram.3
The parties disagree on whether the disputed transactions
increased Jerry’s adjusted basis in Ram. Each of those
transactions involved funds provided to Ram directly from someone
other than Jerry. Petitioners contend that Jerry indirectly
3 Sec. 7491(a), which places the burden of proof upon the
Commissioner in specified circumstances, is inapplicable to this
case. Sec. 7491(a) applies only to court proceedings arising
from examinations commencing after July 22, 1998. Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
105-206, sec. 3001(c), 112 Stat. 727.
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