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The amount of the net operating loss apportioned
to any shareholder pursuant to the above rule is
limited under section 1374(c)(2) to the adjusted basis
of the shareholder’s investment in the corporation;
that is, to the adjusted basis of the stock in the
corporation owned by the shareholder and the adjusted
basis of any indebtedness of the corporation to the
shareholder. * * * [S. Rept. 1983, 85th Cong., 2d
Sess. (1958), 1958-3 C.B. 922, 1141.]
The Court of Appeals then went on to conclude:
In the transaction at issue in this case, the
taxpayers in 1967 merely exchanged demand notes between
themselves and their wholly owned corporations; they
advanced no funds to either Lubbock or Albuquerque.
Neither at the time of the transaction, nor at any
other time prior to or during 1969 was it clear that
the taxpayers would ever make a demand upon themselves,
through Lubbock, for payment of their note. Hence, as
in the guaranty situation, until they actually paid
their debt to Lubbock in 1970 the taxpayers had made no
additional investment in Albuquerque that would
increase their adjusted basis in an indebtedness of
Albuquerque to them within the meaning of section
1374(c)(2)(B). * * * [Underwood v. Commissioner, supra
at 312; fn. refs. omitted.]
In Shebester v. Commissioner, supra, the taxpayer was a
majority shareholder in two S corporations, A & L and Hennessey.
In late 1979, the taxpayer assumed the liability of A & L to
Hennessey. A & L’s books were adjusted with a debit to accounts
payable and a credit to notes payable. Hennessey’s books were
adjusted with a debit to the taxpayer’s drawing account and a
credit to accounts receivable. At the end of the year, the
taxpayer’s drawing account was closed by debiting the taxpayer’s
undistributed taxable income account in an amount including the
amount of the debt assumed. We concluded that the charge to the
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