Gitlitz v. Commissioner, 531 U.S. 206, 13 (2001)

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218

GITLITZ v. COMMISSIONER

Opinion of the Court

The sequencing question is expressly addressed in the statute. Section 108(b)(4)(A) directs that the attribute reductions "shall be made after the determination of the tax imposed by this chapter for the taxable year of the discharge." (Emphases added.) See also 1017(a) (applying the same sequencing when 108 attribute reduction affects basis of corporate property). In order to determine the "tax imposed," an S corporation shareholder must adjust his basis in his corporate stock and pass through all items of income and loss. See 1366, 1367 (1994 ed. and Supp. III). Consequently, the attribute reduction must be made after the basis adjustment and pass-through. In the case of petitioners, they must pass through the discharged debt, increase corporate bases, and then deduct their losses, all before any attribute reduction could occur. Because their basis increase is equal to their losses, petitioners have no suspended losses remaining. They, therefore, have no net operating losses to reduce.

Although the Commissioner has now abandoned the reasoning of the Court of Appeals below,8 we address the pri-8 The Commissioner has abandoned his argument related to the sequencing issue before this Court. This abandonment is particularly odd given that the sequencing issue predominated in the Commissioner's argument to the Court of Appeals. Notwithstanding the Commissioner's attempt at oral argument to distance himself from the reasoning of the Court of Appeals on this issue—the Commissioner represented to us that the Court of Appeals developed its reading of the statute sua sponte, Tr. of Oral Arg. 22-24, 27—it is apparent from the Commissioner's brief in the Court of Appeals that the Commissioner supplied the very sequencing theory that the Court of Appeals adopted. Compare, e. g., Brief for Appellee in Nos. 98-9009 and 98-9010 (CA10), p. 28 ("First, the discharge of indebtedness income that is excluded under Section 108(a) at the corporate level is temporarily set aside and has no tax consequences . . . . Second, PDW & A computes its tax attributes, i. e., taxpayers' suspended losses. Third, the excluded discharge of indebtness income is applied against and eliminates the suspended losses. Because the excluded income is applied against—and offset by—the suspended losses, no item of income flows through to taxpayers under Section 1366(a), and no upward basis adjust-

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