Gitlitz v. Commissioner, 531 U.S. 206, 4 (2001)

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Cite as: 531 U. S. 206 (2001)

Opinion of the Court

crease, we must decide whether the increase occurs before or after taxpayers are required to reduce the S corporation's tax attributes.

I

David Gitlitz and Philip Winn 1 were shareholders of P. D. W. & A., Inc., a corporation that had elected to be taxed under Subchapter S of the Code, 26 U. S. C. 1361-1379 (1994 ed. and Supp. III). Subchapter S allows shareholders of qualified corporations to elect a "pass-through" taxation system under which income is subjected to only one level of taxation. See Bufferd v. Commissioner, 506 U. S. 523, 525 (1993). The corporation's profits pass through directly to its shareholders on a pro rata basis and are reported on the shareholders' individual tax returns. See 1366(a)(1)(A).2 To prevent double taxation of income upon distribution from the corporation to the shareholders, 1367(a)(1)(A) permits shareholders to increase their corporate bases by items of income identified in 1366(a) (1994 ed. and Supp. III). Corporate losses and deductions are passed through in a similar manner, see 1366(a)(1)(A), and the shareholders' bases in the S corporation's stock and debt are decreased accordingly, see 1367(a)(2)(B), 1367(b)(2)(A). However, a shareholder cannot take corporate losses and deductions into account on his personal tax return to the extent that such items exceed his basis in the stock and debt of the S corporation. See

1 Each man filed a joint tax return with his wife.

2 Section 1366(a)(1) provides: "In determining the tax under this chapter of a shareholder for the share-holder's taxable year in which the taxable year of the S corporation ends . . . , there shall be taken into account the shareholder's pro rata share of the corporation's—

"(A) items of income (including tax-exempt income), loss, deduction, or credit the separate treatment of which could affect the liability for tax of any shareholder . . . ."

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