William H. Maloof - Page 6

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          corporation is entitled to deduct losses the S corporation                  
          sustained.  Petitioner bears the burden of proof.4                          
               When an S corporation incurs losses, the shareholders of the           
          S corporation, unlike shareholders of a C corporation, can                  
          directly deduct their share of the entity level losses in                   
          accordance with the flowthrough rules of subchapter S.  Section             
          1366(a)5 provides for the pro rata flowthrough of subchapter S              
          corporation income, losses, and deductions to the shareholders.             
          Section 1366(d)(1), however, limits the aggregate amount of                 
          flowthrough losses and deductions a shareholder may claim.                  
               The losses cannot exceed the sum of the shareholder’s                  
          adjusted basis in his or her stock and the shareholder’s adjusted           
          basis of any indebtedness of the S corporation to the                       
          shareholder.  Sec. 1366(d)(1)(A) and (B).  This restriction                 

               4The Commissioner’s determinations are presumed correct, and           
          the taxpayer bears the burden of proving otherwise.  Rule 142(a);           
          Welch v. Helvering, 290 U.S. 111, 115 (1933).  Moreover,                    
          deductions are a matter of legislative grace, and the taxpayer              
          bears the burden of proving he or she is entitled to any                    
          deduction claimed.  INDOPCO, Inc. v. Commissioner, 503 U.S. 79,             
          84 (1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440             
          (1934); Welch v. Helvering, supra.  This includes the burden of             
          substantiation.  Hradesky v. Commissioner, 65 T.C. 87, 90 (1975),           
          affd. per curiam 540 F.2d 821 (5th Cir. 1976).  The burden of               
          proof may shift to the Commissioner in certain situations if the            
          taxpayer complies with substantiation requirements and cooperates           
          with reasonable requests of the Commissioner.  Sec. 7491(a)(2).             
          Because petitioner failed to show he satisfied these                        
          requirements, the burden of proof remains with petitioner.                  
               5All section references are to the Internal Revenue Code in            
          effect for the years in issue, and all Rule references are to the           
          Tax Court Rules of Practice and Procedure.                                  

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