Lawrence G. Williams - Page 7

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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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