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C. Petitioners’ Income Tax Returns and Respondent’s
Determination
Petitioners filed Federal income tax returns for 1996 and
1997 and an amended return for 1996. Petitioners deducted losses
from Green Valley of $234,945 for 1996 and $193,920 for 1997.
Respondent determined that petitioner’s basis in Green
Valley stock was $23,965 in 1996 and $7,499 in 1997, and that
petitioners’ deduction of losses from Green Valley is limited to
the amount of that basis.
OPINION
A. Background and Petitioners’ Position
Petitioners contend that petitioner’s basis in Green Valley
stock includes amounts of Green Valley’s debts he guaranteed.
A shareholder of an S corporation may deduct his or her pro
rata share of the S corporation’s losses, but the deduction may
not exceed the sum of the shareholder’s adjusted basis in his or
her stock and the shareholder’s adjusted basis in any
indebtedness of the S corporation to the shareholder. Sec.
1366(d)(1)(A) and (B).
A taxpayer using the cash method of accounting generally may
not increase the basis in his or her S corporation stock in the
amount of a guaranty until the taxpayer makes an actual economic
outlay (i.e., a payment) under the guaranty. Goatcher v. United
States, 944 F.2d 747, 751 (10th Cir. 1991); Estate of Leavitt v.
Commissioner, 875 F.2d 420, 422 (4th Cir. 1989), affg. 90 T.C.
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