- 26 -
the corporation is thereafter released from its obligation to
repay, it will enjoy a net increase in assets equal to the
forgiven portion of the debt, and the basis for the original
exclusion thus evaporates. See Commissioner v. Tufts, 461 U.S.
300, 307, 310-311 n.11 (1983); Commissioner v. Jacobson, supra at
38; United States v. Kirby Lumber Co., 284 U.S. 1, 3 (1931).
Here, we note that petitioner's construction of section 108
permits him to increase his basis in stock despite the absorption
and/or elimination of the enumerated tax attributes which is the
"cost" of excluding COD income from gross income. Petitioner's
statutory approach, in effect, vitiates the general Congressional
design of subjecting income in the indefinite future to taxation.
See S. Rept. 96-1035, supra at 11, 1980-2 C.B. 625.8 Similarly,
in the partnership context and prior to the enactment of the
provision at issue here, we have observed that an increase in
basis is allowable when COD income is actually recognized, and no
basis increase is warranted when application of the insolvency
exception prevents such recognition. Babin v. Commissioner, 23
8We also note that in order for a shareholder to increase
the basis in his or her stock, or in the S corporation
shareholder's adjusted basis derived and apportioned from the
indebtedness owed by the corporation itself, to absorb deductions
or losses, the shareholder must make a genuine economic outlay.
See Uri v. Commissioner, 949 F.2d 371 (10th Cir. 1991), affg.
T.C. Memo. 1989-58; see also Hitchens v. Commissioner, 103 T.C.
711, 715 (1994). In this instance, petitioner has not made a
genuine economic outlay.
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