Mark N. Wright and Erica Y. Wright - Page 18

                                       - 18 -                                         
          remains on petitioners to prove that respondent’s determination             
          of income tax deficiencies is incorrect.                                    
          II. S Corporations                                                          
               A. General Rules                                                       
               An S corporation is a small business corporation that has an           
          S corporation election in effect for the taxable year pursuant to           
          section 1362(a).  Sec. 1361(a)(1).  Sections 1366 through 1368              
          govern the tax treatment of S corporation shareholders.  Section            
          1366(a)(1) provides that a shareholder shall take into account              
          his or her 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.  Stated                   
          otherwise, section 1366 establishes a regime under which items of           
          an S corporation are generally passed through to shareholders,              
          rather than being subject to tax at the corporate level.  Section           
          1366(d)(1), however, limits the aggregate amount of such                    
          flowthrough losses and deductions that a shareholder may claim to           
          the sum of (1) his or her adjusted basis in the stock of the S              
          corporation and (2) his or her adjusted basis in any indebtedness           
          of the S corporation to the shareholder.                                    
               As regards basis, section 1012 sets forth the foundational             
          principle that the basis of property for tax purposes shall be              
          the cost of the property.  Cost, in turn, is defined by                     
          regulation as the amount paid for the property in cash or other             

Page:  Previous  8  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  Next

Last modified: May 25, 2011