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Respondent claims that the Estate is entitled to the entire
loss generated by each of Davidge and Kuma for 1990 even though
it did not own any shares of either corporation until December 3,
1990, the date petitioner filed for bankruptcy. Respondent
contends that the Estate is entitled to the entire loss generated
during 1990 because the Estate owned all the shares of Davidge
and Kuma as of December 31, 1990, the corporations’ yearend.
Petitioner counters that he is entitled to approximately 11
months’ worth of the losses generated during 1990. Relying on
section 1377(a)(1), which allocates each item of corporate income
or loss pro rata on a per share per day of ownership basis,
petitioner argues that he should be allocated that portion of the
loss generated by each corporation during the time in 1990 that
he owned all the shares of Davidge and Kuma; i.e., the portion
attributable to the period from January 1 through December 3,
1990. Petitioner essentially argues that bankruptcy proceedings
do not alter the rules for allocating income and loss to S
corporation shareholders under section 1377. He reasons that the
transfer of his shares in Davidge and Kuma to his Estate should
be treated like any other disposition under section 1377
entitling him to receive a pro rata share of each loss.
We agree with respondent. Section 1398 specifically applies
to individuals in bankruptcy and must be considered before
applying the rules of section 1377 to S corporation shareholders
in bankruptcy. Under section 1398(f)(1), a transfer of an asset
from the debtor to the bankruptcy estate when the debtor files
for bankruptcy is not a disposition triggering tax consequences,
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