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income increase the shareholder’s basis in stock of the S
corporation (stock basis), and items of loss decrease the
shareholder’s stock basis. Sec. 1367(a). In the instant case,
Messrs. Brooks each had a zero basis in their stock in the
company at all relevant times.
Although a shareholder may not reduce stock basis below
zero, a shareholder with a zero stock basis may recognize further
losses to the extent of the shareholder’s debt basis, including
the shareholder’s advances to the S corporation. See sec.
1366(d)(1). Section 1367(b)(2)(A) and section 1.1367-2(b),
Income Tax Regs., provide that a shareholder must reduce debt
basis (but not below zero) to the extent that the shareholder’s
pro rata share of losses exceeds the shareholder’s stock basis,
after taking into account any income items for the tax year.6 In
5(...continued)
(A) the adjusted basis of the shareholder’s stock in
the S corporation (determined with regard to paragraphs (1)
and (2)(A) 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).
6Sec. 1.1367-2(b) Reduction in basis of indebtedness--
(1) General rule. If, after making the adjustments required
by section 1367(a)(1) for any taxable year of the S corporation,
the amounts specified in section 1367(a)(2)(B), (C), (D), and (E)
(relating to losses, deductions, noncapital, nondeductible
expenses, and certain oil and gas depletion deductions) exceed
the basis of a shareholder’s stock in the corporation, the excess
(continued...)
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