- 19 -
petitioners were not "at risk" as of the close of 1992, 1993, and
1994, with respect to the amounts borrowed from Huntington, and
disallowed the deductions on that basis. Furthermore, respondent
determined in the alternative that if any of the foregoing
deductions from MMS were allowed, then the payment by guarantors
of $1,350,000 in 1994 was "taxable forgiveness of debt income" to
petitioners.14
OPINION
Issue 1. Section 1366(d)(1)(B) Basis Limitation
Section 1366(a) provides that a shareholder of an S
corporation shall take into account his pro rata share of the S
corporation's items of income, loss, deduction, or credit.
However, a shareholder may deduct his share of the S corporation’s
losses only to the extent of his adjusted basis in his stock of
the S corporation, sec. 1366(d)(1)(A), and "the shareholder’s
adjusted basis of any indebtedness of the S corporation to the
shareholder", sec. 1366(d)(1)(B) (emphasis added). Any S
corporation losses so limited may be carried forward indefinitely.
Sec. 1366(d)(2).
The jurisprudence in this area has fleshed out certain
principles relating to the limitation set forth in section
1366(d)(1)(B) and the situations under which a shareholder
14 Respondent now contends that only $900,000 of the Dec.
29, 1994, payment by the guarantors constitutes cancellation of
indebtedness income to petitioners.
Page: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NextLast modified: May 25, 2011