Salvador A. and Kathleen M. Gaudiano - Page 7

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          realization of COD income that was excluded under section 108(a).           
          After the initial briefs were filed by the parties, Nelson v.               
          Commissioner, 110 T.C. 114 (1998), was released by the Court.  In           
          his reply brief, respondent relies upon Nelson.  Petitioners do             
          not attempt to distinguish Nelson from the instant case but                 
          instead assert that Nelson was incorrectly decided.                         
               In Nelson, we held that COD income realized and excluded               
          from gross income under section 108(a) does not pass through to             
          shareholders of an S corporation as an item of income in                    
          accordance with section 1366(a)(1) so as to enable an S                     
          corporation shareholder to increase the basis of his stock under            
          section 1367(a)(1).  We held in that case that section 108 is not           
          designed or intended to be a permanent exemption from tax.  Id.             
          at 125.  Excluded COD income is not "tax-exempt" pursuant to                
          section 1366(a)(1) and, thus, is not statutorily required to pass           
          through to the S corporation shareholders.  Id.                             
               We see no need to repeat our detailed analysis on this issue           
          contained in Nelson.  See Friedman v. Commissioner, T.C. Memo.              
          1998-196; Chesapeake Outdoor Enters., Inc. v. Commissioner, T.C.            
          Memo. 1998-175.  We hold, following Nelson, that the COD income             
          in the amount of $1,289,048 that Four A excluded from gross                 
          income under section 108(a) is not a separately stated item of              
          tax-exempt income for purposes of section 1366(a)(1)(A).                    







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