- 36 -
There’s a significant difference between COD under section
108, on the one hand, and items such as life insurance proceeds
under section 101 and tax-exempt bond interest under section 103,
on the other. The reference to “tax-exempt” income in section
1366(a)(1)(A) is clearly intended to include receipts excluded
from gross income under such sections as 101 and 103, which
represent returns on or arising from investment by or on behalf
of the recipient. The reference does not include excluded COD
that is attributable to loans to the S corporation by third-party
creditors; the entire structure of the subchapter S regime denies
basis to shareholders who lack any such investment. See, e.g.,
Spencer v. Commissioner, 110 T.C. ___, ___ (1998), and cases
cited at slip op. 25.
IV.
In Winn v. Commissioner, supra, the introduction of
Respondent’s Memorandum of Facts and Law in Support of
Respondent’s Objection to Petitioner’s Cross Motion for Partial
Summary Judgment in docket No. 5359-96 observes in passing that,
even if the taxpayer should be entitled to the upward basis
adjustment he claims, his right to take it into account for
current tax purposes would be subject to the at-risk limitations
under section 465.
6(...continued)
matter, etc.).
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