Use of suspended losses due to basis limitations is strictly limited to the shareholder at the time the losses are suspended.

• Author: Starr, Samuel P.
• Position: Brief Article

In Letter Ruling (TAM) 9552001, the IRS ruled that a taxpayer may not deduct losses disallowed and suspended under Sec. 1366(d) (1) at a time when the taxpayer's former spouse owned the stock.

According to the facts, the taxpayer and spouse separately owned shares in the S corporation. The spouse's basis in the S corporation was reduced in the first year, leaving an allocation of losses suspended under Sec. 1366(d) (1). Pursuant to a divorce, the spouse transferred all of the S shares to the taxpayer.

Sec. 1366(d) (2) provides an S shareholder with the opportunity to carry over losses indefinitely. The Service stated that "[i]n permitting the shareholder to carryover losses that would otherwise expire, Congress restricted the transfer of any losses...