T.C. Memo. 1999-64
UNITED STATES TAX COURT
WILLIAM C. WITZEL AND GENE E. WITZEL, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 6592-97. Filed March 4, 1999.
Wayne A. Cooper, for petitioners.
John Q. Walsh, for respondent.
MEMORANDUM OPINION
VASQUEZ, Judge: Respondent determined a deficiency of
$602,119 in petitioners' 1993 Federal income tax.
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After concessions,1 the sole issue for decision is whether
discharge of indebtedness (COD) income excluded under section
108(a) from the gross income of an S corporation passes through
to the shareholder of the S corporation as an item of income
under section 1366(a)(1)(A) and consequently increases the basis
of the shareholder's stock in the S corporation under section
1367.2
The parties submitted this case fully stipulated. Rule 122.
The stipulation of facts and the exhibits attached thereto are
incorporated herein by this reference. At the time they filed
the petition, petitioners resided in Sandwich, Illinois.
Background
At all relevant times, petitioner3 was the sole shareholder
of Water Products Co. of Illinois, Inc. (Water Products), an S
corporation. In 1991, Water Products declared bankruptcy under
chapter 11 of the Bankruptcy Code.
In 1992, Water Products realized COD income under section
61(a)(12) in the amount of $5,404,323. As a result of its
1
Petitioners concede that respondent's adjustments to
their itemized deductions, deduction for exemptions, and
alternative minimum tax are correct if the Court concludes
petitioners are not entitled to increase the basis in their S
corporation stock.
2
All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
3
References to "petitioner" are to William C. Witzel.
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bankruptcy, Water Products excluded the COD income from its gross
income.
In 1992, petitioner had suspended losses (under section
1366(d)) from Water Products in the amount of $2,964,481 and a
zero basis in his Water Products stock before considering the
effect of the excluded COD income.
For 1993, petitioners filed a joint Federal income tax
return. On the return, petitioners increased the basis in the
Water Products stock by the amount of the excluded COD income
($5,404,323). As a result of the increased basis, in 1993,
petitioners deducted suspended losses of $2,549,251.
Discussion
Petitioners argue that they were entitled to increase their
basis in Water Products stock by their share of the excluded COD
income. In Nelson v. Commissioner, 110 T.C. 114 (1998), we held
that COD income excluded by section 108(a) did not pass through
to an S corporation shareholder under section 1366(a)(1)(A);
therefore, the S corporation shareholder could not increase his
basis in the stock under section 1367(a)(1).
Petitioners do not distinguish this case from Nelson.
Petitioners, however, contend that in Nelson we failed to
consider the following legal issues: (1) The reduction of tax
attributes dictated by section 108(b) is an alternative to
taxation and does not mean that excluded COD income is not tax-
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exempt, (2) Congress' intent to treat all shareholders in S
corporations similarly under section 108(d)(7), and (3) the
dissimilarity in treatment between section 103 (exclusion of
State bond interest from gross income) and section 108. We
disagree with petitioners. In Nelson, we addressed all of these
arguments in detail. Nelson v. Commissioner, supra at 122-125.
We shall follow our recent Court-reviewed opinion. We
therefore conclude that petitioners may not increase their basis
in the stock by the amount of the excluded COD income.
To reflect the foregoing,
Decision will be entered
for respondent.