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interest. Petitioners argued, for the first time, that “We
really think that the issue here is the 1990 return, not the 1989
return.” Petitioners then proceeded to argue that the Schedule L
to Zephyr’s Form 1120S for 1990 reflected COD income, which was
not required to be “reported” because of section 108.
Petitioners now argue that such COD income must be reflected in
the calculation of the Roses’ basis in Zephyr.
As detailed in our findings of fact, supra pp. 30-33, no
direct references were made and no explanations were provided in
Zephyr’s Forms 1120S as to the amounts that Zephyr received from
PK Ventures and its subsidiaries for years prior to 1990. On its
Form 1120S for 1990, Zephyr represented that “No income or
expense items where [sic] reported on the tax return due to the
fact that the corporation was not solvent after the completion of
the bankruptcy.” Petitioners now argue that COD income was
reflected on Zephyr’s return in an attachment, although not on
the face of the return, because (1) Zephyr’s net loss from
operations was eliminated by the amount of excluded COD income
and (2) in Schedule L to the Form 1120 for 1990, assets and
liabilities were eliminated and retained earnings were increased
to reflect COD income of $7,144,750 that was excluded under
section 108.
Respondent argues that the Court lacks jurisdiction to
increase the basis of the Roses in Zephyr as belatedly sought by
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