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Nicholas
P. DiNatale, CPA - News and Featured Articles SUPREME COURT RULES DEBT DISHCARGE INCOME INCREASES STOCK BASIS The U.S. Supreme Court yesterday handed S-corporation shareholders a victory, ruling that discharged-debt income may be used to step up the shareholder's basis in an insolvent S corp's stock. Reversing the 10th Circuit, the high court held that the plain language of the Internal Revenue Code establishes that excluded discharged debt is an "item of income," which passes through to shareholders and increases their bases in an S corporation's stock. The court also resolved whether the attribute reduction (required under Code Section 108(b)) occurs before or after the income pass-through. The answer is after. The sequence of events is important. That's because, if attribute reduction is performed before the pass-through, the shareholders' losses that exceed basis would be treated as the corporation's net operating loss and reduced by the amount of the discharged debt. To the shareholders in the case the Supreme Court heard, this would mean no suspended losses, and thus no deductions. However, by reducing attributes after the discharged debt income is passed through, the shareholders can deduct their losses up to the amount of the increase in basis caused by the discharged debt. S corporations that had discharge of debt income in prior years but did not take advantage of deductions that they could have, you should immediately consider filing amended returns. Citation: Gitlitz v. Commissioner, No. 99-1295 (S. Ct. 1/9/01). ****************************************************** This news item is sponsored by Kleinrock's Forms Library Plus! ****************************************************** Back
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