Mel T. Nelson - Page 11

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               Petitioner, in effect, argues that the result of the                   
          interaction between section 108(d)(7)(B) and (b)(2), as governed            
          by section 108(b)(4), is to apply the attribute reduction rules             
          of section 108(b)(2) at the shareholder level.  Section 108(b)(4)           
          states that the reduction in tax attributes will be made "after             
          the determination of the tax imposed * * * for the taxable year             
          of the discharge."  (Emphasis added.)  Next, petitioner points              
          out that "suspended losses" under section 1366(d)(1)-(3) are                
          deemed to be net operating losses.  Sec. 108(d)(7)(B).  Stated in           
          a different manner, the "suspended losses" of section 1366(d)(1)            
          constitute a tax attribute to be reduced pursuant to section                
          108(b)(2).  Such "suspended losses" are determined at the                   
          shareholder level.  Sec. 1366(d)(1).  Consequently, petitioner              
          extrapolates that the reduction in tax attributes occurs on the             
          shareholder level.  Similarly, petitioner reasons that COD income           
          excluded under section 108(a)(1) passes through to the                      
          shareholder, increases his or her stock basis, and thus affects             
          his or her "suspended losses" under section 1366(d).  According             
          to petitioner, all of this occurs at the shareholder level, prior           
          to the reduction in tax attributes under section 108(b)(2).                 
               Accordingly, in order for petitioner to prevail in this                
          matter, the COD income otherwise excluded from gross income must            
          pass through the corporate form and be apportioned on a pro rata            
          basis among the subchapter S shareholders.  We disagree with                





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