Gitlitz v. Commissioner, 531 U.S. 206, 9 (2001)

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214

GITLITZ v. COMMISSIONER

Opinion of the Court

ceiving discharge of indebtedness. But the Commissioner is unable to identify language in the statute that makes this distinction relevant, and we certainly find none.

On the contrary, the statute makes clear that 108(a)'s exclusion does not alter the character of discharge of indebtedness as an item of income. Specifically, 108(e)(1) reads:

"Except as otherwise provided in this section, there shall be no insolvency exception from the general rule that gross income includes income from the discharge of indebtedness."

This provision presumes that discharge of indebtedness is always "income," and that the only question for purposes of 108 is whether it is includible in gross income. If discharge of indebtedness of insolvent entities were not actually "in-come," there would be no need to provide an exception to its inclusion in gross income; quite simply, if discharge of indebtedness of an insolvent entity were not "income," it would necessarily not be included in gross income.

Notwithstanding the plain language of the statute, the Commissioner argues, generally, that excluded discharge of indebtedness is not income and, specifically, that it is not "tax-exempt income" under 1366(a)(1)(A).6 First, the

6 The Commissioner also contends, as does the dissent, that because 108(d)(7)(A) mandates that the discharged debt amount be determined and applied to reduce tax attributes "at the corporate level," rather than at the shareholder level, the discharged debt, even if it is some type of income, simply cannot pass through to shareholders. In other words, the Commissioner contends that 108(d)(7)(A) excepts excluded discharged debt from the general pass-through provisions for S corporations. However, 108(d)(7)(A) merely directs that the exclusion from gross income and the tax attribute reduction be made at the corporate level. Section 108(d)(7)(A) does not state or imply that the debt discharge provisions shall apply only "at the corporate level." The very purpose of Subchapter S is to tax at the shareholder level, not the corporate level. Income is determined at the S corporation level, see 1363(b), not in order to tax

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