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

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 to another shareholder. The use of the words `with respect to that shareholder' in [sections]1366(d) (2) requires that all losses be personal to a shareholder and that the losses not be transferred in any manner."

When a shareholder has suspended losses and is anticipating a transfer of those shares, serious consideration should be given to those losses immediately prior to the transfer. The losses cannot be transferred and are specifically identified to the shareholder who owned the stock when the losses were suspended.