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(B) the discharge occurs when the
taxpayer is insolvent, or
(C) the indebtedness discharge is
qualified farm indebtedness, or
(D) in the case of a taxpayer other than
a C corporation, the indebtedness discharged
is qualified real property indebtedness.
Thus, section 108(a)(1) provides an exclusion for COD income if
(A) the discharge occurs in a title 11 case, (B) the discharge
occurs when the taxpayer is insolvent, (C) the indebtedness
discharged is qualified farm indebtedness,or (D) the debtor is a
C corporation and the discharged debt is qualified real property
business indebtedness.
Section 108(d)(7)(A) specifies that in the case of an S
corporation, certain provisions of section 108 shall be applied
at the corporate level. We have held that, where COD income of
an S corporation is shielded from recognition by section
108(d)(7)(A), the income does not flow through to, or increase
the basis of, the S corporation's shareholders. Nelson v.
Commissioner, 110 T.C. 114 (1998); Friedman v. Commissioner, T.C.
Memo. 1998-196; Chesapeake Outdoor Enterprises, Inc. v.
Commissioner, T.C. Memo. 1998-175; see also Winn v. Commissioner,
T.C. Memo. 1998-71. Thus, petitioner, as an S corporation
shareholder, would be precluded from increasing his basis in
Impact's stock on account of COD income excluded from Impact's
gross income by reason of insolvency.
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Last modified: May 25, 2011