T.C. Memo. 1998-71
UNITED STATES TAX COURT
PHILIP D. AND ELEANOR G. WINN, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent *
DAVID A. AND LOUISE A. GITLITZ, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 5358-96, 5359-96. Filed February 19, 1998.
Darrell D. Hallett, Larry N. Johnson, Robert J. Chicoine,
and John M. Colvin, for petitioners.
Keith G. Medleau, for respondent.
*
This opinion replaces the prior opinion of this Court in
these cases, Winn v. Commissioner, T.C. Memo. 1997-286, which is
hereby withdrawn.
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MEMORANDUM OPINION
COHEN, Chief Judge: In Winn v. Commissioner, T.C. Memo.
1997-286, we concluded that respondent's motions for summary
judgment should be denied, and petitioners' cross-motions for
partial summary judgment should be granted. Thereafter,
respondent filed a motion for reconsideration. Released today is
the Opinion in Nelson v. Commissioner, 110 T.C. ___ (1998), in
which the Court decides the same legal issue, to wit, whether
discharge of indebtedness income to an S corporation increases a
shareholder's basis in the stock of the corporation, in favor of
respondent. The arguments discussed in Nelson were fully briefed
and argued in these cases. Under these circumstances,
respondent's motion for reconsideration will be granted. This
Memorandum Opinion replaces T.C. Memo. 1997-286, which is hereby
withdrawn.
Background
Respondent determined a deficiency of $242,555 in Philip D.
and Eleanor G. Winn's (the Winns) 1992 Federal income tax and a
deficiency of $251,192 in David A. and Louise A. Gitlitz's (the
Gitlitzes) 1991 Federal income tax. At the time their respective
petitions were filed, all petitioners resided in Colorado.
Philip D. Winn (Winn) and David A. Gitlitz (Gitlitz) were
shareholders in P.D.W. & A., Inc. (PDW&A), a Colorado
corporation. In 1991, PDW&A had an election in effect to be
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taxed as an S corporation. Effective January 1, 1992, PDW&A
revoked its S corporation election.
PDW&A was a partner in Parker Properties Joint Venture
(Parker). Parker realized $4,154,891 in discharge of
indebtedness income in 1991. PDW&A's distributive share of
Parker's discharge of indebtedness income in 1991 was $2,021,296.
At the time that Parker realized the discharge of indebtedness
income, PDW&A was insolvent to the extent of $2,181,748.
Winn increased his basis in his PDW&A stock by the amount of
his pro rata share ($1,010,648) of the discharge of indebtedness
income. Winn did not claim a loss on the Winns' 1991 Federal
income tax return because Winn believed that the passive activity
loss limitations prevented him from doing so. On the Winns' 1992
Federal income tax return, Winn claimed losses from PDW&A that
were carried over from 1991 totaling $1,010,648.
Gitlitz increased his basis in his PDW&A stock by the amount
of his pro rata share ($1,010,648) of the discharge of
indebtedness income. Gitlitz claimed losses from PDW&A totaling
$1,010,648 on the Gitlitzes' 1991 Federal income tax return.
Absent the basis increase, the deductibility of these losses
would have been suspended under section 1366(d), I.R.C.
Respondent disallowed the losses claimed by Winn and Gitlitz
on the premise Winn and Gitlitz lacked sufficient basis in their
PDW&A stock.
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Discussion
Under Rule 121, Tax Court Rules of Practice and Procedure, a
summary adjudication may be made "if the pleadings, answers to
interrogatories, depositions, admissions, and any other
acceptable materials, together with the affidavits, if any, show
that there is no genuine issue as to any material fact and that a
decision may be rendered as a matter of law." Rule 121(b), Tax
Court Rules of Practice and Procedure. The parties agree that
whether discharge of indebtedness income increases a taxpayer's
basis in his S corporation stock may be decided as a matter of
law.
In Nelson v. Commissioner, 110 T.C. ___, filed this date,
the Court agreed with respondent that a shareholder of an
insolvent S corporation may not increase his or her basis to
reflect discharge of indebtedness income to the S corporation.
That Opinion is controlling here. Respondent's motions for
summary judgment will be granted, and petitioners' cross-motions
for partial summary judgment will be denied.
Appropriate orders
will be issued.