- 20 - effect of COD income excluded under section 108 upon the earnings and profits of a subsidiary corporation for purposes of sec. 1.1502-32, Income Tax Regs. for the 1987 taxable year. We held in that case that COD income had to be included in the corporate taxpayer's subsidiary's earnings and profits for purposes of the investment basis adjustment rules of section 1.1502-32, Income Tax Regs. Accordingly, CSI Hydrostatic Testers, Inc. v. Commissioner, supra, was decided within the context of the consolidated return regulations as applicable to the subchapter C corporations. We observed: We find nothing in sections 1.1502-32 and 1.1502-19, Income Tax Regs., which prevents the application of section 312(l) when calculating a subsidiary's earnings and profits for the purpose of either the investment basis adjustment rules or the requirement that the balance of an excess loss account be included in a parent corporation's income when its subsidiary becomes insolvent. Consequently, COD income is included in a subsidiary's earnings and profits for purposes of computing the parent corporation's balance in its excess loss account in the stock of its subsidiary under section 1.1502-19, Income Tax Regs. [Id. at 411.] In other words, we concluded that a specific provision in the Internal Revenue Code (section 312(l)) served to increase the earnings and profits of the subsidiary and resulted in a reduction or decrease in the parent corporation's income tax liability. Here, there is no express support for the proposition that the COD income must pass through to the shareholders of an S corporation. In that regard, section 108(d)(7)(A) is thePage: Previous 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Next
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