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& Lime, Inc. (Adjustment C) wherein the Respondent
proposes to allow the Petitioners an additional
deduction in 1990 in the amount of $798,490.00 and to
disallow deductions in 1991 and 1992 in the amounts of
$868,812.00 and $615,355.00, respectively.
Subsequent to the Roses’ filing their petition with the
Court, the Supreme Court issued its opinion in Gitlitz v.
Commissioner, 531 U.S. 206 (2001). In Gitlitz v. Commissioner,
supra, the Supreme Court held that shareholders of an insolvent
S corporation may increase their basis in their interest in the
S corporation by their pro rata share of cancellation of
indebtedness (COD) income to the S corporation. Id. at 212-216.
Petitioners filed their trial memorandum with the Court on
February 4, 2004. In their trial memorandum, petitioners made
the following assertion:
The Commissioner has failed to increase Mr. Rose’s
basis in Zephyr to account for Rose’s proportionate
share of excluded cancellation of indebtedness income
arising from the Zephyr Bankruptcy. Mr. Rose’s basis
should be increased by approximately $1,900,000 to
reflect the amount of this Gitlitz adjustment. * * *
In respondent’s trial memorandum, also filed with the Court on
February 4, 2004, respondent claimed that the following issue was
unresolved: “22. Whether petitioners have sufficient basis to
deduct claimed flow-through losses from Zephyr Rock & Lime, Inc.
in 1990, 1991, and 1992?”
In their posttrial briefs dealing with basis issue,
petitioners contended that the Supreme Court’s holding in Gitlitz
v. Commissioner, supra, should allow the Roses to increase their
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