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that gross income does not include income derived from interest
paid on any State or local bond. See also Cotton States
Fertilizer Co. v. Commissioner, 28 T.C. 1169, 1172-1173
(1957)(discussion of "wholly exempt" from tax versus postponement
of tax).
Moreover, the legislative history with respect to section
108 manifests an intention to "insure that the debt discharge
amount eventually will result in ordinary income". S. Rept. 96-
1035, at 11 (1980), 1980-2 C.B. 620, 625. Finally, the U.S.
Supreme Court observed in United States v. Centennial Sav. Bank,
499 U.S. 573, 580 (1991):
The effect of section 108 is not genuinely to exempt
such income from taxation, but rather to defer the
payment of the tax by reducing the taxpayer's annual
depreciation deductions or by increasing the size of
taxable gains upon ultimate disposition of the reduced-
basis property.
In short, section 108 is not designed or intended to be a
permanent exemption from tax. We, therefore, reject petitioner's
argument that excluded COD income is "tax-exempt" pursuant to
section 1366(a)(1)(A) and, thus, is statutorily required to pass
through to the S corporation shareholders.
Next, petitioner cites CSI Hydrostatic Testers, Inc. v.
Commissioner, 103 T.C. 398 (1994), affd. per curiam 62 F.3d 136
(5th Cir. 1995), as being analogous and dispositive of this case.
However, we find the citation to be inapposite. The issue in CSI
Hydrostatic Testers, Inc. v. Commissioner, supra, entailed the
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