Mel T. Nelson - Page 1

                                   110 T.C. No. 12                                    

                               UNITED STATES TAX COURT                                

                            MEL T. NELSON, Petitioner v.                              
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 20811-95.                Filed February 19, 1998.           

                    Petitioner was the sole shareholder of M, an S                    
               corporation.  In the 1991 taxable year, M was                          
               insolvent.  In that year, M disposed of all of its                     
               assets and realized discharge of indebtedness income                   
               pursuant to sec. 61(a)(12), I.R.C.  In accordance with                 
               sec. 108(a), I.R.C., M excluded from gross income the                  
               entire amount of the discharge of indebtedness income.                 
               Sec. 108(a), I.R.C., excludes from gross income,                       
               discharge of indebtedness income if, inter alia, the                   
               taxpayer is insolvent.                                                 
                    In the same year, petitioner increased the basis                  
               of his stock in M.  Later, petitioner disposed of the                  
               stock.  In turn, petitioner reported a long-term                       
               capital loss on his 1991 Federal income tax return.  R                 
               disallowed a portion of the claimed long-term capital                  
               loss on the premise that sec. 108(d)(7)(A), I.R.C., did                
               not permit an increase in petitioner's basis in M                      
               stock. Sec. 108(d)(7)(A), I.R.C., provides that the                    
               discharge of indebtedness income exclusion from gross                  

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