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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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