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bankruptcy, Water Products excluded the COD income from its gross
income.
In 1992, petitioner had suspended losses (under section
1366(d)) from Water Products in the amount of $2,964,481 and a
zero basis in his Water Products stock before considering the
effect of the excluded COD income.
For 1993, petitioners filed a joint Federal income tax
return. On the return, petitioners increased the basis in the
Water Products stock by the amount of the excluded COD income
($5,404,323). As a result of the increased basis, in 1993,
petitioners deducted suspended losses of $2,549,251.
Discussion
Petitioners argue that they were entitled to increase their
basis in Water Products stock by their share of the excluded COD
income. In Nelson v. Commissioner, 110 T.C. 114 (1998), we held
that COD income excluded by section 108(a) did not pass through
to an S corporation shareholder under section 1366(a)(1)(A);
therefore, the S corporation shareholder could not increase his
basis in the stock under section 1367(a)(1).
Petitioners do not distinguish this case from Nelson.
Petitioners, however, contend that in Nelson we failed to
consider the following legal issues: (1) The reduction of tax
attributes dictated by section 108(b) is an alternative to
taxation and does not mean that excluded COD income is not tax-
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Last modified: May 25, 2011