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how excluded COD is to be characterized. As made clear by Judge
Foley and amplified in Part I. above, that question is of no
moment. The only relevant inquiry under section 1366 is not
whether COD excluded from gross income of an insolvent S
corporation is “tax-exempt income”, but whether it’s a
passthrough item at all. Because section 108(d)(7)(A) dictates
that it isn’t (as the majority and Judge Foley and I agree), it
doesn’t pass through to the shareholder under section
1366(a)(1)(A), and can’t increase the basis of his stock under
section 1367(a)(1)(A).
If the characterization question is to be addressed, as the
majority opinion undertakes to do, I believe there’s a
complementary relationship between respondent’s “deferred income”
argument and respondent’s other argument that COD excluded under
section 108 is an unrealized “tax nothing” for the purposes of
subchapter S: COD of an insolvent S corporation is “deferred
income” to the extent the S corporation has tax attributes to
adjust; as to any excess, it’s a “tax nothing”.
Both the majority opinion (pp. 22-23) and Judge Foley’s
concurring opinion paraphrase and quote as having application the
legislative history of the Bankruptcy Tax Act of 1980, S. Rept.
96-1035, 2 (1980), 1980-2 C.B. 620, 621: “Once a taxpayer
reduces its tax attributes pursuant to section 108(b)(2) `Any
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