Common use of Reduction in basis of indebtedness Clause in Contracts

Reduction in basis of indebtedness. (i) A has been the sole shareholder in Cor- poration S since 1992. In 1993, A loans S $1,000 (Debt No. 1), which is evidenced by a ten- year promissory note in the face amount of $1,000. In 1996, A loans S $5,000 (Debt No. 2), which is evidenced by a demand promissory note. On December 31, 1996, the basis of A’s stock is zero; the basis of Debt No. 1 has been reduced under paragraph (b) of this section to $0; and the basis of Debt No. 2 has been re- duced to $1,000. On January 1, 1997, A loans S $4,000 (Debt No. 3), which is evidenced by a demand promissory note. For S’s 1997 tax- able year, the sum of the amounts specified in section 1367(a)(1) (in this case, nonsepa- rately computed income and the excess de- duction for depletion) is $6,000, and the sum of the amounts specified in section 1367(a)(2) (B), (D), and (E) (in this case, items of sepa- rately stated deductions and losses, noncap- ital, nondeductible expenses, and certain oil and gas depletion deductions—there is no nonseparately computed loss) is $10,000. Cor- poration S makes no payments to A on any of the loans during 1997. (ii) The $4,000 excess of loss and deduction items is applied to reduce the basis of each indebtedness in proportion to the basis of that indebtedness over the aggregate bases of the indebtedness to the shareholder (de- termined immediately before any adjust- ment under section 1367(b)(2)(A) and para- graph (b) of this section is effective for the taxable year). Thus, the basis of Debt No. 2 is reduced in an amount equal to $800 ($4,000 (excess) × $1,000 (basis of Debt No. 2)/$5,000 (total basis of all debt)). Similarly, the basis in Debt No. 3 is reduced in an amount equal to $3,200 ($4,000 × $4,000/$5,000). Accordingly, on December 31, 1997, A’s basis in his stock is zero and his bases in the three debts are as follows: Debt 1/1/96 basis 12/31/96 reduction 1/1/97 basis 12/31/97 reduction 1/1/98 basis No. 1 .. $1,000 $1,000 $0 $0 $0 No. 2 .. 5,000 4,000 1,000 800 200 No. 3 .. ............ ................ 4,000 3,200 800

Reduction in basis of indebtedness. (i) A has been the sole shareholder in Cor- poration S since 1992. In 1993, A loans S $1,000 (Debt No. 1), which is evidenced by a ten- year promissory note in the face amount of $1,000. In 1996, A loans S $5,000 (Debt No. 2), which is evidenced by a demand promissory note. On December 31, 1996, the basis of A’s stock is zero; the basis of Debt No. 1 has been reduced under paragraph (b) of this section to $0; and the basis of Debt No. 2 has been re- duced to $1,000. On January 1, 1997, A loans S $4,000 (Debt No. 3), which is evidenced by a demand promissory note. For S’s 1997 tax- able year, the sum of the amounts specified in section 1367(a)(1) (in this case, nonsepa- rately computed income and the excess de- duction for depletion) is $6,000, and the sum of the amounts specified in section 1367(a)(2) (B), (D), and (E) (in this case, items of sepa- rately stated deductions and losses, noncap- ital, nondeductible expenses, and certain oil and gas depletion deductions—there is no nonseparately computed loss) is $10,000. Cor- poration S makes no payments to A on any of the loans during 1997. (ii) The $4,000 excess of loss and deduction items is applied to reduce the basis of each indebtedness in proportion to the basis of that indebtedness over the aggregate bases of the indebtedness to the shareholder (de- termined immediately before any adjust- ment under section 1367(b)(2)(A) and para- graph (b) of this section is effective for the taxable year). Thus, the basis of Debt No. 2 is reduced in an amount equal to $800 ($4,000 (excess) × $1,000 excess)×$1,000 (basis of Debt No. 2)/$5,000 (total basis of all debt)). Similarly, the basis in Debt No. 3 is reduced in an amount equal to $3,200 ($4,000 × $4,000/$5,0004,000×$4,000/$5,000). Accordingly, on December 31, 1997, A’s basis in his stock is zero and his bases in the three debts are as follows: Debt 1/1/96 basis 12/31/96 reduction 1/1/97 basis 12/31/97 reduction 1/1/98 basis No. 1 .. $1,000 $1,000 $0 $0 $0 No. 2 .. 5,000 4,000 1,000 800 200 No. 3 .. ............ ................ 4,000 3,200 800

Reduction in basis of indebtedness. (i) A has been the sole shareholder in Cor- poration S since 1992. In 1993, A loans S $1,000 (Debt No. 1), which is evidenced by a ten- year promissory note in the face amount of $1,000. In 1996, A loans S $5,000 (Debt No. 2), which is evidenced by a demand promissory note. On December 31, 1996, the basis of A’s stock is zero; the basis of Debt No. 1 has been reduced under paragraph (b) of this section to $0; and the basis of Debt No. 2 has been re- duced to $1,000. On January 1, 1997, A loans S $4,000 (Debt No. 3), which is evidenced by a demand promissory note. For S’s 1997 tax- able year, the sum of the amounts specified in section 1367(a)(1) (in this case, nonsepa- rately computed income and the excess de- duction for depletion) is $6,000, and the sum of the amounts specified in section 1367(a)(2) (B), (D), and (E) (in this case, items of sepa- rately stated deductions and losses, noncap- ital, nondeductible expenses, and certain oil and gas depletion deductions—there is no nonseparately computed loss) is $10,000. Cor- poration S makes no payments to A on any of the loans during 1997. (ii) The $4,000 excess of loss and deduction items is applied to reduce the basis of each indebtedness in proportion to the basis of that indebtedness over the aggregate bases of the indebtedness to the shareholder (de- termined immediately before any adjust- ment under section 1367(b)(2)(A) and para- graph (b) of this section is effective for the taxable year). Thus, the basis of Debt No. 2 is reduced in an amount equal to $800 ($4,000 (excess) × $1,000 excess)×$1,000 (basis of Debt No. 2)/$5,000 (total basis of all debt)). Similarly, the basis in Debt No. 3 is reduced in an amount equal to $3,200 ($4,000 × $4,000/$5,0004,000×$4,000/$5,000). Accordingly, on December 31, 1997, A’s basis in his stock is zero and his bases in the three debts are as follows: Debt 1/1/96 basis 12/31/96 reduction 1/1/97 basis 12/31/97 reduction 1/1/98 basis No. 1 .. .......................................................................................... $1,000 $1,000 $0 $0 $0 No. 2 .. .......................................................................................... 5,000 4,000 1,000 800 200 No. 3 .. ............ .......................................................................................... ................ .................... 4,000 3,200 800 (i) The facts are the same as in Example