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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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