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and Doralynn Goodman's 1994 and 1995 Federal income taxes. By
notice dated July 16, 1998, respondent determined deficiencies
in, and penalties relating to, John and Phyllis Ray's 1993 and
1995 Federal income taxes. After concessions, the sole issue for
decision is whether discharge of indebtedness income that is
excluded, pursuant to section 108, from the gross income of an S
corporation increases the bases of petitioners’ S corporation
stock. The parties submitted this case fully stipulated pursuant
to Rule 122. All section references are to the Internal Revenue
Code in effect for the years in issue, and all Rule references
are to the Tax Court Rules of Practice and Procedure.
At the time the petitions were filed, petitioners resided in
Plano, Texas. During 1993, Messrs. Goodman and Ray were
shareholders in Scientific Plastics, Inc., an S corporation.
That year, Scientific Plastics, Inc., realized, but excluded
pursuant to section 108(a), $1,583,365 of discharge of
indebtedness income.
On December 31, 1993, petitioners had suspended (i.e.,
unused) losses relating to Scientific Plastics, Inc. Petitioners
increased their stock bases by the amount of their pro rata
shares of Scientific Plastics, Inc.’s, discharge of indebtedness
income and, on their 1993 tax returns, deducted their losses.
Respondent contends that, pursuant to Nelson v.
Commissioner, 110 T.C. 114 (1998), affd. 182 F.3d 1152 (10th Cir.
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