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i.e., insolvent or bankrupt. In contrast, the COD income
exclusion is determined at the corporate level for purposes of an
S corporation. Sec. 108(d)(7)(A).
Section 108(d)(6) permits the inference that Congress
intended to decouple the treatment of the COD income exclusion
with respect to partnerships and S corporations. Prior to
amendment in 1984, section 108(d) provided that, like
partnerships, section 108 applied to S corporations at the owner,
not the entity, level. The legislative history of the 1984
amendments to section 108(d)(7)(A) states:
In order to treat all shareholders in the same manner,
the bill provides that the exclusion of income arising
from the discharge of indebtedness and the
corresponding reductions in tax attributes (including
losses which are not allowed by reason of any
shareholder's basis limitation) are made at the
corporate level. [H. Rept. 98-432, at 1019 (1984.]
Consequently, we believe that Congress intended to preclude the
separate treatment and/or outcomes for S corporation shareholders
as opposed to the approach delineated in section 108(d)(6).5
That method is consistent with the application of the COD income
exclusion at the corporate level. In other words, if Congress
had intended a step-up in basis to accompany the recognition of
5Arguably, the statutory design reflects that the
shareholders of an S corporation are generally not entitled to
include in their basis for the stock of the corporation their
share of the corporation's indebtedness to third parties. Estate
of Leavitt v. Commissioner, 90 T.C. 206 (1988), affd. 875 F.2d
420 (4th Cir. 1989).
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