James H. Pugh, Jr., and Alexis C. Pugh - Page 4




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          1991, having determined that the underpayments of tax were "due             
          to negligence or intentional disregard of rules and regulations."           
          Discussion                                                                  
               Inclusion of COD Income in Basis                                       
               Petitioners argue that petitioner was correct in increasing            
          the basis in his ECC stock by his share of the COD income.  In              
          Nelson v. Commissioner, 110 T.C. 114 (1998), we held that COD               
          income realized and excluded from gross income under section                
          108(a) does not pass through to shareholders of an S corporation            
          as an item of income in accordance with section 1366(a)(1) so as            
          to enable an S corporation shareholder to increase the basis of             
          his stock under section 1367(a)(1).  Petitioners do not                     
          distinguish this case from Nelson v. Commissioner, supra.  They             
          ask us to overrule a recent Court-reviewed opinion, as being                
          decided incorrectly.  We decline to do so.  Accordingly, we hold            
          that petitioner may not increase the basis in his ECC stock by              
          his share of the COD income.                                                
               Accuracy-related Penalties                                             
               Section 6662(a) imposes an accuracy-related penalty of 20              
          percent on any portion of an underpayment of tax that is                    
          attributable to items set forth in section 6662(b).  Included in            
          those items is negligence or disregard of rules or regulations.             
          Sec. 6662(b)(1).  Section 6662(c) provides that for purposes of             
          section 6662, "the term 'negligence' includes any failure to make           
          a reasonable attempt to comply with the provisions of this title,           



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