Mel T. Nelson - Page 4

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          his 1991 Federal income tax return in the amount of $2,403,996.             
          Respondent denied $1,375,790 of the loss on the premise that                
          petitioner lacked sufficient basis in his MAI stock.                        
                                 Ultimate Conclusion                                  
               We hold that COD income that is excluded from gross income             
          under section 108(a) does not pass through to a shareholder of an           
          S corporation.  Therefore, shareholder basis is not increased.              
                                       OPINION                                        
               In the instant case, the principal controversy is whether              
          petitioner is entitled to increase the basis in his S corporation           
          stock pursuant to section 1366(a)(1) by his pro rata share of COD           
          income.  This issue is a question of law.  Babin v. Commissioner,           
          23 F.3d 1032, 1034 (6th Cir. 1994), affg. T.C. Memo. 1992-673.              
               Section 61 requires that certain amounts be included in                
          income.  Absent any exclusionary provision, items of income are             
          included in gross income.  Sec. 61(a).  Section 61(a)(12)                   
          includes COD income in gross income.  See also United States v.             
          Kirby Lumber Co., 284 U.S. 1 (1931).  Sections 101 through 135              
          exclude specific items of income from gross income.  In                     
          particular, section 108(a)(1) provides, in pertinent part, that a           
          taxpayer is permitted to exclude COD income to the extent that a            
          taxpayer is insolvent when the discharge of indebtedness occurs.            
          Section 108(d)(3) defines "insolvency" for this purpose as the              







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