Your newest client, Smiles PC, is a dental practice providing comprehensive dental services in the Houston area. The corporation is solely owned by Mark W. Nguyen, DDS, and has been set up as an S corporation since its inception five years ago. Nguyen is the only dentist in the practice and works full-time. He also has two full-time dental hygienists, one office manager and one administrative assistant in the office.

At the beginning of the current year, Nguyens stock basis in Smiles PC totaled $30,000. The corporation had $100,000 in outstanding debt at year-end, the result of purchasing expensive dental equipment. The debt is under the name of the corporation but is personally guaranteed by Nguyen. During the current year, Smiles PC sustained a net ordinary loss of $50,000. Nguyen is an employee of the corporation and was paid a salary of $120,000 for the year; he also took a cash distribution $10,000.

Dr. Nguyen has called your office today and would like to know how much of the loss he will be able to deduct on his personal return. He is envisioning a sizable refund as a result of the loss deduction.

Required:

Write a two-page memo to Dr. Mark Nguyen addressing in detail the issue of his loss deduction. Will he be able to take any loss deduction for the year? May he use the corporations debt to flow through the loss into his return? Are there ways to structure the debt to allow the loss pass-through? In your memo, support your answers with all of the following research sources which have been provided in a separate pdf file. Explicitly refer to them in your memo and integrate them throughout to support your answers. Use the facts of the case explicitly in your memo.

• IRC Section 1366 Pass-Thru of Items to Shareholders
• IRC Section 1368 Distributions
• Reg Sec. 1.1366-2 Limitations on Deductions of Pass-through Items of an S Corporation to its Shareholders
• Revenue Ruling 75-144
• Brown v Commissioner, US Court of Appeals (CA-6), 82-1372, May 4, 1983
• Keech v Commissioner, TC Memo 1993-71, March 3, 1993
• Maguire v Commissioner, TC Memo 2012-160, June 6, 2012
• Phillips v Commissioner, TC Memo 2017-061, April 10, 2017

In addition, complete Form 6198, At-Risk Limitations, which would be required as part of Dr. Nguyens personal return. You may use the simplified computation.