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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 the
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