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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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Last modified: May 25, 2011