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After concessions,1 the sole issue for decision is whether
discharge of indebtedness (COD) income excluded under section
108(a) from the gross income of an S corporation passes through
to the shareholder of the S corporation as an item of income
under section 1366(a)(1)(A) and consequently increases the basis
of the shareholder's stock in the S corporation under section
1367.2
The parties submitted this case fully stipulated. Rule 122.
The stipulation of facts and the exhibits attached thereto are
incorporated herein by this reference. At the time they filed
the petition, petitioners resided in Sandwich, Illinois.
Background
At all relevant times, petitioner3 was the sole shareholder
of Water Products Co. of Illinois, Inc. (Water Products), an S
corporation. In 1991, Water Products declared bankruptcy under
chapter 11 of the Bankruptcy Code.
In 1992, Water Products realized COD income under section
61(a)(12) in the amount of $5,404,323. As a result of its
1 Petitioners concede that respondent's adjustments to
their itemized deductions, deduction for exemptions, and
alternative minimum tax are correct if the Court concludes
petitioners are not entitled to increase the basis in their S
corporation stock.
2 All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
3 References to "petitioner" are to William C. Witzel.
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Last modified: May 25, 2011