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is the amount that SDC paid to TGC pursuant to the 1992 contract,
i.e., $1,049,117, and not the $215,000 that petitioners claimed
in Form 4562 relating to Mr. Horwath’s 1997 Schedule C.
Respondent disagrees with the foregoing contentions of
petitioners. However, respondent appears to agree with petition-
ers, albeit for reasons different from those advanced by them,
that petitioners, as the stockholders of TGC, would be entitled
to any depreciation deductions for the taxable years at issue
with respect to the computer simulator that the Court were to
allow. In support of that position, respondent asserts on brief:
during the years at issue, petitioners were the only
shareholders of TG&C; thus, they controlled the com-
puter simulator and the depreciation deduction would
have flowed through to them. Thus, the net effect on
petitioners is the same whether the depreciation deduc-
tion is taken on Schedule C or flowed through to them.
* * *
On the record before us, we reject the foregoing position of
respondent as contrary to section 1366(d)(1). Section 1366(d)(1)
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 share-
holder’s stock in the S corporation (deter-
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