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Petitioner timely filed petitions with this Court contesting
respondent’s disallowance of the losses and liability for the
accuracy-related penalty for each year at issue.
Petitioner received a discharge in bankruptcy on November
26, 1997. The $4 million Citibank loan was discharged.
OPINION
I. Whether Petitioner or the Bankruptcy Estate Is Entitled to
the 1990 Losses
The Bankruptcy Tax Act of 1980, Pub. L. 96-589, sec. 3, 94
Stat. 3397, added section 1398 to eliminate uncertainty and
litigation by detailing how Federal income tax attributes and
liabilities are to be allocated between the bankruptcy estate and
the individual debtor. See sec. 1398; see also S. Rept. 96-1035,
at 8-13 (1980), 1980-2 C.B. 620, 623-626. Filing a bankruptcy
petition creates a new taxable entity for Federal tax purposes,
the bankruptcy estate, which is a separate and distinct taxpayer
from the individual debtor. See 11 U.S.C. sec. 541(a) (2000);
sec. 1398. The debtor continues as a separate taxable entity
during the pendency of the bankruptcy proceeding. Sec. 1398.
Section 1398 dictates whether the bankruptcy estate or the
individual debtor reports income, deductions, and credits and
when either taxpayer succeeds to the tax attributes of the other.
This is a case of first impression in which we must decide
whether filing individual bankruptcy alters the rules that
otherwise apply under subchapter S regarding the allocation and
deductibility by an individual shareholder of losses of S
corporations incurred in the calendar year in which the
individual shareholder files for bankruptcy.
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