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of Income, Credits, Deductions, Etc., and Schedules K-1,
Shareholder's Share of Income, Credits, Deductions, Etc.,
attached to its return for the year in issue.
On July 15, 1996, respondent issued an FSAA with respect to
Chesapeake's TYE March 19, 1992. Respondent disallowed
deductions for accrued interest expenses in the amount of
$317,583 forgiven by Chase Manhattan and Tec Media in the same
year as the accrual. Furthermore, under the heading "Other
Adjustment: Basis of Shareholders", respondent determined an
adjustment to the shareholders' aggregate basis in Chesapeake
stock in the amount of $995,000. In "Remarks" included on the
Schedule of Adjustments, respondent stated that
The discharge of indebtedness income that is excluded
from gross income under section 108(a) * * * does not
pass through to the Subchapter S Corporation's
shareholders as a separately stated item of tax-exempt
income under section 1366(a)(1). Accordingly, the
shareholders' stock basis under Section 1367 is not
increased.
Petitioner timely filed a petition for readjustment of subchapter
S items on October 9, 1996.
Pursuant to a Stipulation of Agreed Adjustments filed on
September 29, 1997, petitioner conceded the correctness of
respondent's adjustment relating to the disallowed deductions for
accrued interest expenses. On brief, respondent conceded that
the proposed adjustment to Chesapeake's shareholders' stock basis
was inappropriate at the corporate level.
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