Gitlitz v. Commissioner, 531 U.S. 206, 14 (2001)

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

Opinion of the Court

mary arguments made in the Courts of Appeals against petitioners' reading of the sequencing provision. First, one court has expressed the concern that, if the discharge of indebtedness is passed through to the shareholder before the tax attributes are reduced, then there can never be any discharge of indebtedness remaining "at the corporate level," 108(d)(7)(A), by which to reduce tax attributes.9 Gaudiano, 216 F. 3d, at 533. This concern presumes that tax attributes can be reduced only if the discharge of indebtedness itself remains at the corporate level. The statute, however, does not impose this restriction. Section 108(b)(1) requires only that the tax attributes be reduced by "[t]he amount excluded from gross income" (emphasis added), and that amount is not altered by the mere pass-through of the income to the shareholder.

Second, courts have discussed the policy concern that, if shareholders were permitted to pass through the discharge of indebtedness before reducing any tax attributes, the shareholders would wrongly experience a "double windfall":

ment is made under Section 1367(a)" (citations omitted)), with, e. g., 182 F. 3d, at 1151 ("PDW & A first must compute its discharge of indebtedness income and set this figure aside temporarily. The corporation then must calculate its net operating loss tax attribute . . . . Finally, the corporation must apply the excluded discharged debt to reduce its tax attributes. In this case, the net operating loss tax attribute fully absorbs the corporation's excluded discharge of indebtedness income. Thus, there are no items of income to pass through to Gitlitz and Winn").

9 Similar to this argument is the contention that, in cases such as this one in which the shareholders' suspended losses are fully deducted before attribute reduction could take place, no net operating loss remains and no attribute reduction can occur, thus rendering 108(b) inoperative. However, there will be other cases in which 108(b) will be inoperative. In particular, if a taxpayer has no tax attributes at all, there will be no reduction. Certainly the statute does not condition the exclusion under 108(a) on the ability of the taxpayer to reduce attributes under 108(b). Likewise, in the case of shareholders similarly situated to petitioners in this case, there is also the possibility that other attributes, see 108(b)(2)(B)-(G), could be reduced.

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