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individual partner who filed for bankruptcy. At issue in Gulley
was whether a partnership loss incurred during the year in which
the individual partner filed for bankruptcy flowed through to the
partner or his bankruptcy estate. We held that the bankruptcy
petition did not cause the partnership taxable year to close and
that the prepetition losses flowed through to the bankruptcy
estate, not the individual partner.
Our rationale in Gulley applies to these cases. Although
there are distinctions between partnerships and S corporations,
none mandate a different result here from our opinion in Gulley.
Both S corporations and partnerships determine income or loss as
of the last day of the entity’s tax year. See secs. 706(a),
1366(a). The transfer of shares of an S corporation or a
partnership interest to an individual bankruptcy estate when the
debtor files for bankruptcy does not trigger tax consequences
under section 1398(f)(1) and therefore does not require
calculating items of income or loss as between the individual
debtor and the estate.
In Gulley and in these cases, the bankruptcy estate held the
entire interest in each respective entity as of the entity’s tax
yearend. Neither the transfer by the taxpayer in Gulley, nor the
transfer by petitioner, to his respective bankruptcy estate is a
taxable disposition under section 1398(f)(1). See also Smith v.
Commissioner, T.C. Memo. 1995-406. Accordingly, as in Gulley,
the bankruptcy estate, not petitioner, is entitled to the income
or loss of the S corporations.
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