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liquidation. Petitioner's ECC common stock became worthless
during 1990.
In completing its 1990 Form 1120S, U.S. Income Tax Return
for an S Corporation, ECC properly excluded the COD income from
its income pursuant to section 108. On petitioner's Schedule K-1
(Form 1120S), Shareholder's Share of Income, Credits, Deductions,
Etc., ECC separately stated the COD income and reported
petitioner's pro rata share in the amount of $612,245.
Petitioner increased his basis in his ECC stock in 1990 by the
$612,245. Petitioner's basis in his ECC stock on December 31,
1990, taking into account all adjustments other than that for
ECC's COD income, was $394,802. On petitioners' 1990 Federal
income tax return, they reported a capital loss with respect to
the ECC stock commensurate with petitioner's reported basis in
the stock. On their 1991 return, petitioners carried forward and
reported capital losses from 1990. Coopers & Lybrand, a
certified public accounting firm, prepared petitioners' tax
returns for 1990 and 1991 and ECC's return for 1990.
Respondent disallowed the inclusion of the COD income in
petitioner's basis in his ECC stock and reduced Mr. Pugh's loss
accordingly. Respondent also determined increases in
petitioners' income in the amounts of $60,077 and $5,763 for 1990
and 1991, respectively, for gain on the sale of stock in Epoch
Management, Inc., which sale petitioners failed to report on
their returns. Petitioners have conceded the latter adjustments.
Respondent determined accuracy-related penalties for 1990 and
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