- 48 -
from petitioners' gross income under section 108(a)(1)(B). See
sec. 108(a)(3).
C. Tax Attribute Reduction
Any amount excluded under section 108(a)(1)(B) must be
applied to reduce certain tax attributes of the taxpayer,
including, inter alia, any net operating loss or net capital loss
for the taxable year of the discharge and any net operating loss
carryover or any capital loss carryover to such taxable year.
Sec. 108(b)(1) and (2)(A), (D). Respondent contends that in the
event we determine that petitioners are entitled to exclude any
discharge of indebtedness income, then petitioners must eliminate
their claimed tax attributes as follows: A net operating loss of
$163,47533 for 1994; a net operating loss carryover to 1994 of
$238,293; a net short-term capital loss of $5,849 for 1994; and a
long-term capital loss carryover to 1994 of $8,194.34 We agree and
so hold.
33 Petitioners had income from other sources in 1994 that
partially offset the $189,845 loss they claimed for that year
from their investment in MMS.
34 The reduction in petitioners' tax attributes for 1994
noted above results in correlative adjustments to petitioners'
1995 tax attributes; namely, the elimination of the $206,178 net
operating loss carryover, $5,849 short-term capital loss
carryover, and $8,194 long-term capital loss carryover claimed by
petitioners for 1995.
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