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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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Last modified: May 25, 2011