Sid Paul Ruckriegel - Page 19

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          issue 89 Fed. Appx. 656 (9th Cir. 2004); Polack v. Commissioner,            
          T.C. Memo. 2002-145 n.7, affd. on this issue 366 F.3d 608, 613              
          (8th Cir. 2004).                                                            
          III.  Petitioners’ Bases With Respect to Sidal                              
               A.  Principal Statutory Provisions                                     
               Section 1366(a)(1) 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 for the           
          S corporation’s taxable year ending with or in the shareholder’s            
          taxable year.  Section 1366(d)(1), however, limits the amount of            
          such losses and deductions (without distinction, losses) that a             
          shareholder may take into account for any taxable year to an                
          aggregate amount not exceeding the sum of (1) his adjusted basis            
          in the stock of the S corporation and (2) his adjusted basis in             
          any indebtedness of the S corporation to the shareholder.  Any              
          losses so disallowed may be carried forward indefinitely.  See              
          sec. 1366(d)(2).                                                            
               B.  Summary of the Parties’ Arguments                                  
               Petitioners contend that all of the 1997-2000 payments                 
          were, in substance, direct loans from them (one-half each) to               
          Sidal that increased their debt bases in Sidal, under section               
          1366(d)(1)(B), by an amount sufficient to sustain the deductions            
          for Sidal’s operating losses reported on their returns for the              
          audit years.  Respondent contends that all of those payments were           






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