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traps the excluded COD of an S corporation at the corporate level
in a mode similar to the corporate level rules of sections 1374
and 1375 regarding built-in gains and excess net passive income.
Petitioner argues that the only function of section
108(d)(7)(A) is to determine the character of COD as excludable
or not at the corporate level and that it’s then passed through
to the shareholders under the general passthrough regime of
subchapter S. As has been observed, see Blanchard, “Debunking a
Shibboleth”, 58 Tax Notes 1673 (Mar. 22, 1993) (letter to
editor), if petitioner’s passthrough interpretation were correct,
then section 1366(b) would come into play. Section 1366(b)
provides that the character of any item included under section
1366(a)(1) as a passthrough item is determined “as if such item
were realized directly from the source from which realized by the
corporation, or incurred in the same manner as incurred by the
corporation”. Section 1366(b) refutes petitioner’s passthrough
interpretation of section 108(d)(7)(A). There’s no way, actually
or fictively, in which the equivalence rule of section 1366(b)
could apply to a solvent shareholder of an insolvent S
corporation.2
2 It’s interesting but irrelevant that petitioner’s Form
1040 for 1991 includes a Form 982 (Reduction of Tax Attributes
Due to Discharge of Indebtedness (and Section 1082 Basis
Adjustment)) that indicates petitioner was also insolvent and had
substantial COD unrelated to MAI that was applied in reduction of
his own NOL for the year and carryovers from prior years. MAI
(continued...)
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