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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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