                        T.C. Memo. 1995-481



                      UNITED STATES TAX COURT



         OLIVER Q. FOUST AND TALIETHA FOUST, Petitioners
         v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7864-92.                 Filed October 4, 1995.


     Oliver Q. Foust, pro se.

     Thomas M. Rohall, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     RUWE, Judge:   Respondent determined a deficiency in

petitioners' 1988 Federal income tax of $40,558.

     The issues for decision are:   (1) Whether petitioners have

substantiated the basis of their stock in Vosburg Hotels, Inc., a
"small business corporation" under section 1366,1 so as to enable

them to claim a deduction for an ordinary loss of $129,083 and a

deduction pursuant to section 179 of $3,057; (2) whether

petitioners are entitled to a long-term capital loss carryover

from 1987 of $61,468; and (3) whether petitioners' taxable income

should be increased in the amount of $7,399 for Social Security

benefits received during 1988.


                         FINDINGS OF FACT


     Vosburg Hotels, Inc. (Vosburg), was incorporated in

Sacramento, California, on September 3, 1985, and it acquired

assets and began doing business on the same date.   On November

12, 1985, the shareholders of Vosburg elected to be treated as a

"small business corporation" under subchapter S of the Internal

Revenue Code.   At the time of its election, Vosburg had six

shareholders.   Petitioners jointly acquired 179,620 shares.

Petitioners' shares were evidenced by stock certificate number

three which was issued to "Oliver Q. Foust and Talietha Foust as

their community property".   Al and Susan E. Lemerande also

acquired 179,620 shares, and Mark P. and Ruth Owens acquired

359,240 shares.   Petitioners' holdings represented 25 percent of

the corporation's outstanding stock.



     1
      Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
                                 - 3 -

     Stock certificate number three was canceled and replaced by

stock certificate number five on May 15, 1987.    The records

produced at trial indicate that stock certificate number five was

issued to "Irvine Dungan, Trustee for Mark P. Owens".      However, a

corporate questionnaire filed on June 15, 1988, with the

California Department of Alcoholic Beverage Control by Mr. Foust

(petitioner) as president of Vosburg indicates that stock

certificate number five was issued to the "Oliver Q. Foust &

Talietha Foust Family Trust" on May 15, 1987.2

     On December 15, 1988, the shareholders of Vosburg executed

an agreement entitled "Agreement of Purchase and Sale of Capital

Stock of Vosburg Hotels, Inc."    In this agreement, the

shareholders of Vosburg agreed to sell all of the outstanding

shares of Vosburg to Thomas and Juanell Snedeker.    The selling

shareholders were shown as Mark and Ruth Owens and the Oliver Q.

Foust and Talietha Foust Reversionary Trust.     In a "Statement of

Transferee to Accompany Application for Consent to Transfer

Securities Subject to Legend or Escrow Condition", dated December

22, 1988, the selling Vosburg shareholders were listed as Mark P.

Owens and Ruth Owens and the Oliver Q. Foust and Talietha Foust

Reversionary Trust.

     2
      Petitioners created the "Oliver Q. and Talietha Foust,
Reversionary Trust" on Apr. 28, 1972. The corpus of the trust
consisted of stock which the trustees were to distribute to the
beneficiaries (petitioners' nieces) in the event that either
petitioner died prior to the trust's termination on June 28,
1987.
                                - 4 -

     On their Schedules E (Supplemental Income Schedule) for 1985

through 1988, petitioners claimed the following losses from

Vosburg:


                      Year          Loss Claimed

                      1985           $ 19,886
                      1986             48,142
                      1987             94,469
                      1988            129,083


                               OPINION


     Petitioners claimed an ordinary loss deduction of $129,083

as their portion of Vosburg's operating loss for the taxable year

1988.    They also claimed a deduction pursuant to section 1793 of

$3,057 as a result of their stock ownership in Vosburg.

Respondent disallowed both of these deductions.    Respondent's

determinations are presumed correct, and petitioners bear the

burden of proving otherwise.    Rule 142(a); Welch v. Helvering,

290 U.S. 111, 115 (1933).    A "small business corporation" under

subchapter S of the Internal Revenue Code (S corporation) is not

normally subject to corporate income tax.    Sec. 1363(a).

Shareholders include their pro rata share of the corporation's

     3
      Sec. 179 permits a taxpayer who purchases tangible,
personal, depreciable property for use in the active conduct of a
trade or business to expense up to $10,000 of the cost of the
property placed in service in any year. Sec. 179(a), (b), (d).
However, the amount of the deduction cannot exceed the taxpayer's
aggregate amount of taxable income (disregarding sec. 179) from
the active conduct of any trade or business. Sec. 179(b)(3)(A).
                               - 5 -

income, losses, and deductions on their individual tax returns.

Sec. 1366(a)(1).   However, a shareholder is only entitled to

claim losses and deductions to the extent that they do not exceed

the sum of the shareholder's adjusted basis in the corporation's

stock and any indebtedness of the corporation to the shareholder.

Sec. 1366(d)(1).   Accordingly, petitioners must prove that they

had sufficient basis in Vosburg to absorb the loss and deduction

claimed.

     This Court has looked to section 1012 when defining "basis"

for purposes of a shareholder's stock in an S corporation.    See,

e.g., Estate of Leavitt v. Commissioner, 90 T.C 206, 212 (1988),

affd. 875 F.2d 420 (4th Cir. 1989); Borg v. Commissioner, 50 T.C.

257, 263 (1968).   Section 1012 provides that "The basis of

property shall be the cost of such property".     In addition, the

"cost" is "the amount paid for such property in cash or other

property."   Sec. 1.1012-1(a), Income Tax Regs.   Thus, petitioners

must demonstrate the requisite economic outlay necessary for

shareholders to claim basis.   See, e.g., Estate of Leavitt v.

Commissioner, 875 F.2d at 422; Underwood v. Commissioner, 535

F.2d 309, 311 (5th Cir. 1976), affg. 63 T.C. 468 (1975).

     In an attempt to substantiate their basis in Vosburg,

petitioners offered a series of checks written on various

corporate bank accounts.   One of the checks was written on the

corporate bank account of Golden State Convalescent Hospitals,

Inc. (GSCH), in the amount of $25,000.   The check is signed by
                                 - 6 -

petitioner and contains the notation "V.B.H. Investment".     In the

year-to-date general ledger (ledger) for GSCH for the period

ended November 30, 1985, an asset account is shown under account

number 205 and is titled "Investment-Vosburg Hotels Inc."

Moreover, on the Schedule L of GSCH's corporate tax return, there

is an entry listed as an "investment" in the amount of $25,000.

From these records, one would logically conclude that the $25,000

represents GSCH's investment in Vosburg, rather than petitioners'

investment.

     Petitioners also rely on checks drawn on bank accounts at

Bank of America and Wells Fargo Bank, which they referred to as

the "Entity Control Master Account".     These accounts, however,

were corporate bank accounts in the names of "Oliver Q. Foust,

Accountancy Corporation DBA, O. Quay Financial Management

Corporation" and "Oliver Q. Foust, An Accountancy Corporation",

respectively.   None of the checks were written on a personal bank

account.

     Based on this record, we conclude that petitioners have not

presented sufficient evidence to prove that they personally

invested any funds in Vosburg.    In fact, the checks and the

corporate accounting records on which they rely indicate that the

corporations treated the disbursements to Vosburg as assets of

the particular corporation.   Consequently, petitioners have

failed to demonstrate the necessary economic outlay to prove

basis.   They are not entitled, therefore, to deduct any losses
                                 - 7 -

pursuant to section 1366, nor are they entitled to a deduction

pursuant to section 179.4

     Petitioners also claimed a deduction for a long-term capital

loss carryover from 1987 in the amount of $61,468.     This

carryover results primarily from two losses claimed by

petitioners in 1987, which they attempt to carry forward to 1988.

First, petitioners claimed a section 1231 loss of $66,850 for

Vosburg on their 1987 Schedule K-1.      In addition, they claimed a

long-term capital loss of $8,566 on the March 11, 1987, sale of

stock in the Chez Jacques Corp.    According to the notice of

deficiency in this case, these losses were disallowed by

respondent during an audit of petitioners' 1987 tax return.

     Section 165(a) generally permits the deduction of losses

sustained during the taxable year and not compensated for by

insurance or otherwise.     However, capital losses on the sale or

exchange of capital assets are limited to the extent allowed

under sections 1211 and 1212.    Sec. 165(f).   Subject to the

limitations of section 1211,5 taxpayers can carry forward their

     4
      Based on the record before us, we also question whether
petitioners were even shareholders of Vosburg in 1988. Instead,
it appears that the "Oliver Q. Foust and Talietha Foust
Reversionary Trust" was the shareholder at that time.
     5
      Sec. 1211 limits the amount of losses taxpayers can claim
in any taxable year. Deductions for losses on the sale or
exchange of capital assets are permitted only to the extent of
the gain from such sales or exchanges, plus the lower of (1)
$3,000 ($1,500 in the case of a married individual filing
separately); or (2) the excess of such losses over such gains.
                                                   (continued...)
                                   - 8 -

capital losses to succeeding taxable years.        Sec. 1212(b).

Section 1212(b)(1)(B) provides that the excess of the net long-

term capital loss over the net short-term capital gain is to be

treated as a long-term capital loss in the succeeding taxable

year.

       Petitioners bear the burden of proving that they are

entitled to the losses they claim.         Rule 142(a); Benson v.

Commissioner, 80 T.C. 789, 804 (1983); Beales v. Commissioner,

T.C. Memo. 1992-608.       Aside from their 1987 and 1988 tax returns,

however, petitioners offered no evidence to substantiate these

losses.6      Moreover, an entry on a tax return does not establish

the existence of a loss.       Halle v. Commissioner, 7 T.C. 245, 250

(1946), affd. 175 F.2d 500 (2d Cir. 1949); Warden v.

Commissioner, T.C. Memo. 1995-176.         Therefore, we sustain

respondent's determination.

       On their 1988 tax return, petitioners reported adjusted

gross income of ($45,389), thereby enabling them to exclude their

Social Security benefits received during 1988.        See sec. 86(a),

(b).       However, following the other adjustments discussed

previously, respondent increased petitioners' taxable income by

$7,399 to reflect the taxable portion of petitioners' Social

       5
      (...continued)
Sec. 1211(b).
       6
      At trial, Mr. Foust represented himself and his wife pro
se, and he concentrated his entire testimony on the first issue--
his basis, if any, in Vosburg.
                               - 9 -

Security benefits received.   Taxpayers must generally include as

income one-half of the Social Security benefits they receive

during the taxable year.   Sec. 86(a)(1).    Petitioners received

$14,798 of Social Security benefits in 1988.     Because we have

sustained respondent's other adjustments, we conclude that

respondent properly included in petitioners' taxable income one-

half of the $14,798 of Social Security benefits petitioners

received during 1988.



                                            Decision will be entered

                                       for respondent.
