Fleming G. and Sherry H. Brooks - Page 9

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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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