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restoration of debt basis pursuant to section 1367(b)(2)(B) and
section 1.1367-2(c), Income Tax Regs., are hereinafter
collectively referred to as debt basis adjustments.
In the instant case, the record reveals that the amount of
the company’s losses in 1997, 1998, 1999, and 2000, exceeded the
amount of the company’s income in each respective tax year.
Consequently, pursuant to section 1.1367-2(b), Income Tax Regs.,
the losses reduced Messrs. Brooks’s respective open account debt
bases at each respective year end. Respondent does not challenge
petitioners’ recognition of such losses.8
For the purpose of determining taxable income upon an S
corporation’s repayment of shareholder advances, a separate
transaction involving an advance and repayment of indebtedness is
generally treated separately. See sec. 1.1367-2(a), (b)(3),
(c)(2), Income Tax Regs. Shareholders may not offset the
repayment of a shareholder advance with the basis of another
separate shareholder advance. Cornelius v. Commissioner, 58 T.C.
417 (1972) (discussed further below), affd. 494 F.2d 465 (5th
Cir. 1974). However, multiple shareholder advances and
repayments that constitute open account indebtedness are treated
8Respondent concedes that the Dec. 31, 1999, open account
advance provided sufficient debt basis for petitioners to
recognize the losses claimed in 1999 and that the Dec. 29, 2000,
advance provided sufficient debt basis for petitioners to
recognize the losses claimed in 2000.
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