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1366(a)(1). The shareholder may not take into account, however,
S corporation losses and deductions for any taxable year in
excess of the shareholder’s adjusted basis in the S corporation
stock and debt. Sec. 1366(d)(1).4
In order to increase basis in an S corporation, the
shareholder must make an actual economic outlay; to satisfy this
requirement, even in circumstances where the taxpayer purports to
have made a direct loan to the S corporation, the taxpayer must
show that the claimed increase in basis was based on “‘some
transaction which when fully consummated left the taxpayer poorer
in a material sense.’” Bergman v. United States, 174 F.3d 928,
932 (8th Cir. 1999) (quoting Perry v. Commissioner, 54 T.C. 1293,
1296 (1970), affd. 27 AFTR 2d 71-1464, 71-2 USTC par. 9502 (8th
Cir. 1971)); see Hitchins v. Commissioner, 103 T.C. 711, 715
4 More exactly, with respect to taxation of a shareholder of
an S corporation, sec. 1366(a)(1) provides:
there shall be taken into account the shareholder’s pro
rata share of the corporation’s
(A) items of income (including tax-exempt
income), loss, deduction, or credit the
separate treatment of which could affect the
liability for tax of any shareholder, and
(B) nonseparately computed income or loss.
The aggregate amount of losses and deductions taken into
account by such shareholder for a taxable year cannot exceed the
sum of: “(A) the adjusted basis of the shareholder’s stock in
the S corporation * * *, and (B) the shareholder’s adjusted basis
of any indebtedness of the S corporation to the shareholder”.
Sec. 1366(d)(1).
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Last modified: May 25, 2011