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million advance provided sufficient basis to offset the $1.6
million repayment on January 3, 2000, in addition to allowing
recognition of Messrs. Brooks’s pro rata share of losses for
2000.
A lender recognizes income to the extent that repayment of
the debt exceeds the lender’s basis in the debt. See sec.
1001(a), (c). Because a lender generally takes a basis equal to
the face amount of the debt, a repayment generally does not
generate taxable income to the lender. See secs. 1001(a),
1011(a), 1012. However, taxable income may result from the
repayment of a debt if the lender’s basis in the debt is reduced
from the face amount. See sec. 1001(a). If a shareholder
advances money to an S corporation and the shareholder’s pro rata
share of S corporation losses exceeds the shareholder’s basis in
the stock of the S corporation, a reduction in the basis of a
debt may occur. See sec. 1367(b)(2)(A); sec. 1.1367-2(b), Income
Tax Regs.
A shareholder of an S corporation must take into account the
shareholder’s pro rata share of the S corporation’s items of
income, loss, deduction, and credit.5 Sec. 1366(a)(1). Items of
5SEC. 1366(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--
(continued...)
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