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excluded COD income at the shareholder level, it would have
provided for statutory language reaching that result.
Furthermore, the ordering rules provide that the income tax
liability for the taxable year of the COD income is determined
prior to the reduction in tax attributes. Sec. 108(b)(4)(A).
The parties have not cited, and we do not find, authority
addressing the mechanism of section 108(b)(4)(A). Petitioner
asserts that the reductions in tax attributes in section
108(b)(2) are made after the determination of the tax imposed for
the taxable year of the discharge. In other words, the income
tax liability of an S corporation and its shareholders must be
determined first, and only after such liability is determined can
the attributes (including losses suspended under section 1366(d))
be reduced. On the other hand, respondent evidently contends
that the "suspended losses" of section 1366(d)(1) should be
reduced at the S corporation level before the income tax
liability of the shareholder is determined. Thus, respondent
argues that the losses of the S corporation must be eliminated
under section 108(b)(2).
We are not persuaded by petitioner's argument in this
regard. Here, there is nothing in the statutory language which
compels excluded COD income to be included in the calculations
for an S corporation shareholder's income tax liability. Also,
section 108(b)(4)(A) states that the reduction of the tax
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