Gitlitz v. Commissioner, 531 U.S. 206, 6 (2001)

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

Opinion of the Court

sioner, 110 T. C. 114 (1998), aff'd, 182 F. 3d 1152 (CA10 1999),3 however, the Tax Court granted the Commissioner's motion for reconsideration and held that shareholders may not use an S corporation's untaxed discharge of indebtedness to increase their bases in corporate stock. See Winn v. Commissioner, 75 TCM 1840 (1998), ¶ 98,071 RIA Memo TC.

The Court of Appeals affirmed. See 182 F. 3d 1143 (CA10 1999). It assumed that excluded discharge of indebtedness is an item of income subject to pass-through to shareholders pursuant to 1366(a)(1)(A), id., at 1148, 1151, n. 7, but held that the discharge of indebtedness amount first had to be used to reduce certain tax attributes of the S corporation under 108(b), and that only the leftover amount could be used to increase basis.4 The Court of Appeals explained that, because the tax attribute to be reduced (in this case the corporation's net operating loss) was equal to the amount of discharged debt, the entire amount of discharged debt was absorbed by the reduction at the corporate level, and nothing remained of the discharge of indebtedness to be passed through to the shareholders under 1366(a)(1)(A). Id., at 1151. Because Courts of Appeals have disagreed on how to treat discharge of indebtedness of an insolvent S corporation, compare Gaudiano v. Commissioner, 216 F. 3d 524, 535 (CA6 2000) (holding that tax attributes are reduced before excluded discharged debt income is passed through to shareholders), cert. pending, No. 00-459; Witzel v. Commissioner, 200 F. 3d 496, 498 (CA7 2000) (same), cert. pending,

3 In Nelson, the Tax Court held that excluded discharge of indebtedness does not pass through to an S corporation's shareholders because 108 is an exception to normal S corporation pass-through rules. Specifically, the court held that, because 108(d)(7)(A) requires that "subsections (a) [and (b) of 108] shall be applied at the corporate level" in the case of an S corporation, it precludes any pass-through of the discharge of indebtedness to the shareholder level. See Nelson, 110 T. C., at 121-124.

4 Section 108(b)(1) reads: "The amount excluded from gross income under [ 108(a)(1)] shall be applied to reduce the tax attributes of the taxpayer . . . ."

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