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basis in their Zephyr interest by their share of Zephyr’s COD
income resulting from its bankruptcy. Petitioners further
contended that Zephyr recognized COD income in 1989 and that the
Roses’ share of Zephyr’s COD income was, at a minimum,
approximately $1,110,570. Petitioners supported their argument
by Rose’s testimony at trial concerning Zephyr’s outstanding
liabilities in 1988 and 1989. Petitioners concluded:
With the upward adjustment of Rose’s basis resulting
from the pass through of income from discharge of
indebtedness that is excluded from gross income under
section 108(a), Rose may deduct his share of Zephyr’s
losses up to the amount of his basis, including any
losses that were previously suspended at the corporate
level because of a lack of basis in prior years.
Conversely, respondent contended that Gitlitz v. Commissioner,
supra, “does not create a situation in which a taxpayer is
allowed an increase in basis without any proof that a debt has
been discharged or the amount thereof.” Respondent further
contended that “petitioners have offered no proof whatsoever
regarding the amount of any debt which was discharged in Zephyr
Rock’s Chapter 11 proceeding, seeking instead to rely on the
principle established by the Supreme Court in Gitlitz without
proving the amount of the purported debt discharged.” Respondent
concluded that “petitioners have failed to present any evidence
establishing or to otherwise support a tax basis in excess of the
amount which the respondent has agreed to allow.” In
respondent’s supplemental brief, respondent conceded, however,
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