Sec. 108(a)(1) excluded COD income: are "windfall" basis adjustments allowed?
Last year, the Sixth Circuit held in Babin that a partner is not entitled en·ti·tle
tr.v. en·ti·tled, en·ti·tling, en·ti·tles
1. To give a name or title to.
2. To furnish with a right or claim to something: to an increase in the basis of his partnership interest for partnership cancellation of debt (COD) income, when the income is excluded from tax under the Sec. 108(a)(1)(b) insolvency insolvency
Condition in which liabilities exceed assets so that creditors cannot be paid. It is a financial condition that often precedes bankruptcy. In the context of equity, insolvency is the inability to pay debts as they become due; insolvency under the balance-sheet exception. Subsequently, in Letter Ruling (TAM) 9423003, the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. took a comparable position with respect to COD income of an insolvent S INSOLVENT. This word has several meanings. It signifies a person whose estate is not sufficient to pay his debts. Civ. Code of Louisiana, art. 1980.. A person is also said to be insolvent, who is under a present inability to answer, in the ordinary course of business, the responsibility corporation; the S shareholders were not entitled to an increase in the basis of their S stock for their pro rata [Latin, Proportionately.] A phrase that describes a division made according to a certain rate, percentage, or share.
In a Bankruptcy case, when the debtor is insolvent, creditors generally agree to accept a pro rata share of what is owed to them. shares of excluded income.
With respect to both partnerships and S corporations, the Service's position is that income excluded from tax under Sec. 108(a)(1) is not tax-exempt income Tax-exempt income
Dividends and interest not subject to federal and, in some cases, state and local income taxes. for which a basis adjustment is allowed under subchapters K and S. Arguably ar·gu·a·ble
1. Open to argument: an arguable question, still unresolved.
2. That can be argued plausibly; defensible in argument: three arguable points of law. , this position can be justified from a policy perspective: under certain facts, such a basis adjustment can produce a windfall windfall
An unexpected profit or gain. An investor holding a stock that increases greatly in price because of an unexpected takeover offer receives a windfall. to the partners or shareholders of the debtor, a passthrough entity for tax purposes whose debt has been discharged. However, the basis adjustment is warranted under the language of the Code. For this reason, the Service's litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.
When a person begins a civil lawsuit, the person enters into a process called litigation. position is problematic; legislative amendment by Congress, not equitable decisionmaking by the Federal courts, is the appropriate remedy. This article examines the pro and con PRO AND CON. For and against. For example, affidavits are taken pro and con. arguments surrounding this basis adjustment.
According to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. the Supreme Court in Kirby Lumber lumber, term for timber that has been cut into boards for use as a building material. The major steps in producing lumber involve logging (the felling and preparation of timber for shipment to sawmills), sawing the logs into boards, grading the boards according to Co., when a debtor acquires its own debt instrument for less than its face amount, income is recognized equal to the difference between the purchase price and the debt's outstanding balance. Likewise, a lender's COD results in COD income to the debtor. Whether a debt discharge results in COD income is still determined under this judicial doctrine Noun 1. judicial doctrine - (law) a principle underlying the formulation of jurisprudence
judicial principle, legal principle
principle - a rule or standard especially of good behavior; "a man of principle"; "he will not violate his principles" , rather than by the Code. Once it is determined that COD income has been recognized (and that no relevant judicial exception applies), it is includible in gross income under Sec. 61 (a)(12), unless otherwise excluded.
A number of the original cases involving debt discharge were decided during the Depression, when the value of real estate significantly declined; many of the recent cases and rulings have facts reminiscent of these leading decisions and involve debt workouts in the context of distressed real estate projects. These cases and rulings often involve the use of tax entities that either did not exist or were less commonly used in the 1930s (e.g., partnerships and S corporations). Further, Congress added Sec. 108 to the Code via the Bankruptcy Tax Act of 1980 (BTA (Business Technology Association, Kansas City, MO, www.bta.org). A membership association of manufacturers, dealers, distributors and service companies in the business equipment and systems industries, founded in 1994. '80), which codified cod·i·fy
tr.v. cod·i·fied, cod·i·fy·ing, cod·i·fies
1. To reduce to a code: codify laws.
2. To arrange or systematize. several of the judicial exceptions to the general rule that COD results in COD income.
These developments in tax law have forced the courts, the IRS and taxpayers to grapple with to enter into contest with, resolutely and courageously.
See also: Grapple the intricacies of subchapters K and S, as well as the many peculiarities that can arise when COD income is realized in the context of a debtor partnership or S corporation. Technical glitches arise because tax rules enacted at different times under different Code provisions are not well integrated with one another.
Exceptions to Income Recognition
Historically, the courts have recognized a number of exceptions to Kirby Lumber; after that Supreme Court decision, many of those exceptions continued to be respected by the lower courts. Among the many judicial exceptions enunciated by the courts over the years (some of which may no longer be good law), the most significant have held that income is not recognized (1) when the "overall transaction" is a loss, (2) when the cancellation is of nonrecourse debt A nonrecourse debt or non-recourse debt or nonrecourse loan is a secured loan (debt) that is secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable. , (3) when a debt discharge is in economic substance a "purchase price reduction" and (4) to the extent that debt discharge occurs while the debtor is insolvent.
A number of these judicial exceptions were codified in the enactment of Sec. 108. Under Sec. 108(a)(1)(b), when a taxpayer realizes COD income, the income is not recognized to the extent that the debtor is insolvent. Sec. 108(d)(3) defines "insolvency" for this purpose as the excess of liabilities over the fair market value (FMV FMV - full-motion video ) of assets, as of immediately before the discharge. Under Sec. 108(a)(1)(A), COD income is not recognized to the extent that the debt discharge occurs in a bankruptcy proceeding. The following examples illustrate how these two statutory exceptions are applied to an S corporation debtor.
Example 1: An S corporation ("Debtor") is owned by two equal shareholders, X and Y, who each contributed $500,000 in exchange for stock. On Jan. 1, 1996, Debtor purchases a commercial office building on leased land for $11,000,000, using the $1,000,000 in capital contributions and a $10,000,000 bank loan. The loan, which is interest only for 10 years and a balloon payment The final installment of a loan to be paid in an amount that is disproportionately larger than the regular installment.
When a loan is made, repayment of the principal, which is the amount of the loan, plus the interest that is owed on it, is divided into installments due at at maturity, is secured by a first mortgage on the building. The shareholders do not guarantee the loan and are not personally liable for the debt.
For the first five years of operation, Debtor's operating expenses Operating expenses
The amount paid for asset maintenance or the cost of doing business, excluding depreciation. Earnings are distributed after operating expenses are deducted. exactly equal its revenues; hence, there is no net cash flow. Annual tax losses of $282,040 (0.02564 x $11,000,000) attributable to depreciation on the building are allocated 50% to each shareholder. Thus, after five years of operation, both X and Y will have an adjusted basis of zero in their stock, and each will have been allocated $705,100 of tax losses over the period. The deduction for the last $205,100 ($705,100 - $500,000) of such losses would be suspended sus·pend
v. sus·pend·ed, sus·pend·ing, sus·pends
1. To bar for a period from a privilege, office, or position, usually as a punishment: suspend a student from school. for each shareholder under Sec. 1366(d)(1) because of the zero basis in stock.
Due to a decline in the real estate market, the FMV of the building decreases to $5,000,000 after five years. On Jan. 1, 2001, Debtor files for chapter 7 bankruptcy. Pursuant to the liquidation The collection of assets belonging to a debtor to be applied to the discharge of his or her outstanding debts.
A type of proceeding pursuant to federal Bankruptcy , Debtor sells its only asset, the building, for $5,000,000, which the bank accepts in full satisfaction of the loan.
Example 2: The facts are the same as in Example 1, except that on Jan. 1, 2001, Debtor negotiates with the bank outside of bankruptcy. Under a negotiated workout Workout
Informal repayment or loan forgiveness arrangement between a borrower and creditors.
1. The process of a debtor's meeting a loan commitment by satisfying altered repayment terms. , and because the bank does not want to foreclose fore·close
v. fore·closed, fore·clos·ing, fore·clos·es
a. To deprive (a mortgagor) of the right to redeem mortgaged property, as when payments have not been made.
b. on the building or otherwise take title to it, the bank agrees to reduce the outstanding debt from $10,000,000 to the $5,000,000 FMV of the building. Immediately before the workout, Debtor's liabilities exceed the FMV of its assets by more than $5,000,000.
* Tax implications
In each example, Debtor will realize $5 million of COD income, because it has satisfied its debt for less than the outstanding balance due the bank. In Example 1, the building is sold and Debtor's $10 million debt is satisfied for $5 million, with the balance forgiven. In Example 2, the building is retained and the $10 million debt is written down to $5 million, with the balance forgiven. Under Sec. 108(d)(7)(a), for an S corporation debtor, the Sec. 108(a)(1) bankruptcy and insolvency exceptions are applied at the corporate level. Thus in Example 1, the $5 million COD income would be excluded from tax under Sec. 108(a)(1)(a); in Example 2, the COD income would be excluded under Sec. 108(a)(1)(B).
Different results may ensue en·sue
intr.v. en·sued, en·su·ing, en·sues
1. To follow as a consequence or result. See Synonyms at follow.
2. To take place subsequently. if the debtor is a partnership. Sec. 108(d)(6) provides that the bankruptcy and insolvency exceptions are applied at the partner, not the partnership, level. This provision was added to Sec. 108 by the BTA '80 to overturn the Fifth Circuit's holding in Stackhouse, which had applied the insolvency exception at the partnership level (to the benefit of the solvent solvent, constituent of a solution that acts as a dissolving agent. In solutions of solids or gases in a liquid, the liquid is the solvent. In all other solutions (i.e. partners).
Under current law, if Debtor is a general partnership in which X and Y are 50% general partners, all allocations of income and loss are in proportion to each partner's partnership interest and the $10 million loan is nonrecourse, each partner would be allocated $2.5 million of the $5 million COD income. Under Sec. 108(a)(1)(B), the income would be excluded from tax by a partner who is insolvent by at least $2.5 million immediately before the discharge; if the partner were undergoing bankruptcy, the $2.5 million COD income would be excluded under Sec. 108(a)(1)(A).
The separate rules for S corporations and partnerships may come into play pursuant to the same debt discharge. For instance, it is common for an S corporation to be the general partner of a limited partnership. In the case of COD income, Sec. 704(a) and (b) provide that such income will be allocated among the limited partners and the corporate general partner in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.
As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with the partnership agreement or the partners' respective partnership interests. Often, the result is that the corporate general partner will be allocated most of the COD income, because the limited partners are unlikely to have basis (or an obligation to make up a deficit in their capital accounts) at the time of a debt workout. If this occurs, to the extent that the corporate general partner is insolvent (which often is the case, as such partners tend to be thinly capitalized and liable for most, if not all, of the partnership's debt), it should be able to rely on Sec. 108(a). Tracing the allocation of income and basis adjustments attributable to the release of liability, however, can be complex and produce unexpected results, as several other rules must be considered.
Tax Attribute Reduction
Sec. 108(b)(1) and,12) provide that to the extent income is excluded under Sec. 108(a)(1), the following tax attributes of the debtor must be reduced: NOLs, tax credits, capital loss carryovers, asset bases, passive activity carryovers and foreign tax credit carryovers. If the debtor's total tax attributes are less than the excluded income, the excess income disappears.
Under Sec. 108(d)(7)(B), if the debtor is an S corporation, COD income is applied to reduce passthrough losses and deductions for the year of the COD that would have been allowed to the shareholders but for the fact that the losses exceeded their bases. Any remaining COD income reduces the bases of S corporation assets.
In Example 2 above, Debtor would be required to reduce its tax attributes by the $5 million of COD income excluded under Sec. 108(a)(1). Debtor's sole tax attribute is its adjusted basis in the building, which had already been reduced to $9,589,800 by five years' worth of depreciation ($1 1,000,000 - $1,410,200). Thus, Sec. 108(d)(7)(B) would require that the building's adjusted basis be reduced by $5 million to $4,589,800. This would result in the recognition of $410,200 of capital gain [$5,000,000 - $4,589,800), rather than a $4,589,800 capital loss, on a subsequent sale of the building for its $5 million FMV. In other words Adv. 1. in other words - otherwise stated; "in other words, we are broke"
put differently , the effect of the exclusion in this case is merely to defer de·fer 1
v. de·ferred, de·fer·ring, de·fers
1. To put off; postpone.
2. To postpone the induction of (one eligible for the military draft).
In Example 1, in which the building is conveyed for $5 million prior to the debt discharge, the Debtor would recognize a $4,589,800 capital loss ($9,589,800 - $5,000,000); thereafter, it would recognize $5 million of COD income. Debtor would have no tax attributes to reduce at that time, having previously disposed of the building. However, the $205,100 of previously suspended losses of shareholders X and Y would be deemed NOLs of the Debtor under Sec. 108(c)(7)(b) and eliminated.
Some tax practitioners have taken the position that when the debtor is an S corporation, and COD income is excluded under Sec. 108(a)(1)(A) or (B), the S shareholders can increase their stock bases under Sec. 1367(a)(1)(a), which provides that a basis increase is allowed for income items described in Sec. 1366(a)(1)(a). One such income item is tax-exempt income. Thus, there is a strong argument that tax-exempt income for which a basis adjustment is allowed under Sec. 1367(a)(1)(a) includes income excluded under Sec. 108(a).
This basis increase would support the deduction of previously suspended losses because tax attribute reduction, which applies to such suspended losses, is applied after the computation Computation is a general term for any type of information processing that can be represented mathematically. This includes phenomena ranging from simple calculations to human thinking. of the current year's tax. Hence, such a basis increase can be extremely valuable to shareholders of an S corporation holding a distressed property that generated significant tax losses in tax years prior to the COD, which shareholders were unable to deduct de·duct
v. de·duct·ed, de·duct·ing, de·ducts
1. To take away (a quantity) from another; subtract.
2. To derive by deduction; deduce.
v.intr. for lack of stock basis.
In Examples 1 and 2 above, an additional $5 million of basis would be allocated between X and Y in proportion to their stock interests in the corporation. This new-found basis would support a deduction of the $205,100 of previously suspended losses for X and Y prior to the application of the tax attribute rule. If X or Y had basis remaining after tax attribute reduction, it could be claimed as a capital loss on corporate liquidation or support the deduction of subsequent corporate NOLs if operations continued following the debt workout.
A comparable argument can be made that COD income of a partnership excluded under Sec. 108(a)(1) results in a basis increase in the partners' partnership interests. Sec. 705(a)(1)(B) provides for a basis increase for income that is exempt from that a under the Federal income tax laws. Again, the argument is that income excluded under Sec. 108(a) is tax-exempt income for this purpose, so that a basis increase is warranted.
Although the IRS has criticized this position, until recently, there was no authority involving an S corporation debtor. Thus, a return position in which an S shareholder claimed a basis increase might have been supportable by a reasoned construction of the statutes and supported by "substantial authority" for purposes of avoiding the Sec. 6662 accuracy-related penalty.
However, there probably is no such authority for a partner attempting to claim a basis increase for his allocable al·lo·ca·ble
Capable of being allocated.
Adj. 1. allocable - capable of being distributed
distributive - serving to distribute or allot or disperse share of partnership COD income excluded under Sec. 108(a)(1). In 1991, in Est. of Newman, the Second Circuit held that a partner is not allowed a basis increase under Sec. 705(a)(1) for such income. Since that case, there has been no substantial authority for a return position under which an insolvent or bankrupt partner can obtain a basis increase under these circumstances. Possibly, the same negative authority carries over to S shareholders.
Babin and TAM 9423003
In Babin, a bankrupt partnership worked out its $5,170,019 debt to a bank by paying it $2.75 million and having the bank forgive the $2,420,019 balance. It also sold all its assets to a third party for $100,000; thus, it realized a total of $5,270,019 from the sale of assets and COD. The taxpayer, one of the general partners, was allocated 51% of income and 75% of partnership liabilities under the partnership agreement. Because he was insolvent, he excluded from income his $1,234,210 ($2,420,019 x 0.51) share of the partnership's COD income under Sec. 108(a)(1)(B). He claimed a basis adjustment in his partnership interest under Sec. 705(a)(1)(A) in the same amount for the excluded income.
Under Sec. 752(b), the cancellation of a partnership debt results in a deemed distribution to a partner in the amount of the partner's share of the discharged liabilities. When the partner is taxed on his allocable share of such COD income, he increases basis to the extent of that share. In Babin, the taxpayer was relieved of $3,877,514 ($5,170,019 x 0.75) of partnership liabilities because of the workout. By adding his $1,234,210 share of the partnership's COD income to his preexisting pre·ex·ist or pre-ex·ist
v. pre·ex·ist·ed, pre·ex·ist·ing, pre·ex·ists
To exist before (something); precede: Dinosaurs preexisted humans.
v.intr. $2,663,180 basis in his partnership interest, the taxpayer's new basis ($3,897,390) exceeded his share of relieved liabilities ($3,877,514), precluding gain recognition on the workout. On audit, however, the Service disallowed the $1,234,210 basis increase and required the taxpayer to recognize $1,289,334 ($3,952,514 - $2,663,180) of gain on the deemed distribution; the Tax Court agreed.
On appeal, the Sixth Circuit never reached the question of whether income excluded from tax under Sec. 108(a)(1) is exempt from tax under Sec. 705(a)(1)(A). Instead, it concluded that the taxpayer's $1,234,210 share of the partnership's COD income did not pass through to him because he was insolvent (i.e., because the taxpayer was insolvent, no taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. passed through him as a result of the discharge of the partnership's debt). Thus, the taxpayer was not entitled to a basis increase under Sec. 705(a)(1)(A).
There is no language in Sec. 705(a)(1)(A) supporting the Sixth Circuit's interpretation that only income that "passes through" to a partner taxable income qualifies for a basis increase. On the contrary, the section provides. that a basis adjustment is allowed for the partner's allocable share of "taxable income of the partnership." The $2,420,519 of COD income clearly was taxable income of the partnership, and presumably pre·sum·a·ble
That can be presumed or taken for granted; reasonable as a supposition: presumable causes of the disaster. some of the other partners paid tax on their share of such income. Under a literal In programming, any data typed in by the programmer that remains unchanged when translated into machine language. Examples are a constant value used for calculation purposes as well as text messages displayed on screen. In the following lines of code, the literals are 1 and VALUE IS ONE. reading of Sec. 705(a)(1)(A), a basis increase is warranted. Further the logical response to the court would be that if the income did not pass through because it was not taxable income of the partnership, it must have been "income exempt from tax" for which a basis increase is allowed under Sec. 705(a)(1)(B) Either way, the statute supported a basis increase.
The Sixth Circuit's conclusion in Babin seems to have been motivated mo·ti·vate
tr.v. mo·ti·vat·ed, mo·ti·vat·ing, mo·ti·vates
To provide with an incentive; move to action; impel.
mo by the view that the taxpayer would reap a tax windfall if allowed such a basis adjustment. The taxpayer, however, argued that without the basis increase, he would recognize gain on the deemed distribution and, hence, Congress's intention to provide an exception to COD income recognition for an insolvent partner would be defeated. At first glance, the taxpayer's argument is persuasive; on further reflection, several flaws are apparent
First, the court seems to have correctly sensed that partners (and S shareholders) can obtain the benefit of tax deductions Tax deduction
An expense that a taxpayer is allowed to deduct from taxable income.
See deduction. in excess of their capital contributions and amounts at risk if such a basis increase is allowed. In Babin, the taxpayer had previously included in basis his 75% allocable share of the partnership's debt pursuant to Sec. 752(a). Thus, if he lacked basis to support the deemed distribution at the time the $2,420,519 debt was discharged, it was only because he had previously claimed deductions for those tax losses of the partnership, which had reduced his basis in his partnership interest. The discrepancy DISCREPANCY. A difference between one thing and another, between one writing and another; a variance. (q.v.)
2. Discrepancies are material and immaterial. between his 51% allocable share of the partnership's income and his 75% share of its liabilities also produced gain on the deemed distribution, but was unrelated to the basis increase at issue.
The extent to which this basis adjustment is a windfall can be seen more clearly in the case of the Debtor in Examples 1 and 2 above. There, shareholders X and Y each had an initial basis of $500,000 in their stock. Because neither was liable for the Debtor's $10 million debt, neither was entitled to basis attributable to that debt. In fact, $5 million of the total $6 million economic loss with respect to the building was suffered by the bank, not the shareholders. Thus, permitting X and Y each to claim an additional $2.5 million in basis beyond their capital contributions would provide a windfall to them. As shown, the additional basis would support the deduction of the previously suspended losses (e.g., attributable to the depreciation incurred in tax years before the COD and in excess of each shareholder's $500,000 initial basis in his stock). The result would be that X and Y could ultimately claim deductions in excess of the $500,000 in capital each originally invested. Because the bank would also take a deduction for its $5 million loss, total deductions would exceed the total economic loss actually suffered.
In TAM In Tam (September 22, 1916 - April 1, 2006) is a former Prime Minister of Cambodia. He served in that position from May 6 1973 to December 9 1973, and had a long career in Cambodian politics. 9423003, the IRS concluded that a basis increase is not permitted under these facts. The issue there was whether shareholders of an insolvent S corporation that realized COD income were entitled to a basis increase under Sec. 1376(a)(1)(A) for their shares of such income. The IRS National Office, without any support for its position, concluded that the shareholders were not entitled to a basis increase for such income.
A basis increase for COD of a partnership or S corporation, when such income is excluded from tax under Sec. 108(a)(1), is supported by the literal language of the Code. However Babin and TAM 9423003 hold otherwise and create the risk of penalties for taxpayers claiming the basis increase. The potential windfall for S shareholders and partners resulting from such a basis increase in cases such as Babin probably warrants the Service's position from a tax policy standpoint. However, rather than relying on the courts to create new doctrines that effectively overturn results following from the literal language of the Code or simply denying a basis adjustment by fiat [Latin, Let it be done.] In old English practice, a short order or warrant of a judge or magistrate directing some act to be done; an authority issuing from some competent source for the doing of some legal act. , the Treasury is advised to pursue a legislative remedy. Absent a legislative correction, the Code seems to provide this basis adjustment - windfall or not.
 C. Stephen Babin, 23 F3d 1032 (6th Cir. 1994)(73 AFTR AFTR American Federal Tax Reports (Prentice-Hall)
AFTR Americans For Tax Reform
AFTR Air Force Training Ribbon
AFTR Air Force Training Record
AFTR atrophy, fasciculation, tremor, rigidity
AFTR Atomic Frequency Time Reference 2d 94-1961, 94-1 USTC USTC University of Science and Technology of China
USTC United States Tax Cases (Commerce Clearing House)
USTC United States Transportation Command (see USTRANSCOM) [paragraph] 50,224), aff'g TC Memo 1992-673, cert (Computer Emergency Response Team) A group of people in an organization who coordinate their response to breaches of security or other computer emergencies such as breakdowns and disasters. . denied.  IRS Letter Ruling (TAM) 9423003 (2/28/94).  AICPA AICPA
See American Institute of Certified Public Accountants (AICPA). letter to the IRS, dated Apr. 5, 1995; see BNA BNA Bureau of National Affairs, Inc.
BNA Birds of North America
BNA block numbering area (US Census)
BNA British North America
BNA Banco Nacional de Angola (National Bank of Angola) Daily Tax Report (4/10/95), at G-2.  Kirby Lumber Co., 284 US 1 (1931)(10 AFTR 458, 2 USTC [paragraph]814).  See, e.g., John F. Tufts, 461 US 300 (1983)(51 AFTR2d 83-1132, 83-1 USTC [paragraph]9328); Joseph Y. Aizawa,99 TC 197 (1992); Rev. Ruls. 91-31,1991-1 CB 19, and 92-53, 1992-2 CB 48.  Bowers Bowers is a surname, and may refer to
v. de·val·ued also de·valu·at·ed, de·val·u·ing also de·val·u·at·ing, de·val·ues also de·val·u·ates
1. To lessen or cancel the value of. currency does not result in income of the difference between the amount received and amount repaid, when the overall transaction is a loss). This case has long been held in disregard, and should not be considered good law; see, e.g., Herbert Gershkowitz, 88 TC 984 (1987). (7) Fulton Gold Corp., 31 BTA 519 (1934). The IRS, never satisfied with the outcome of this case, stated in Rev. Rul. 91-31, note 4, that it does not consider it to be good law. For a discussion of its continued relevance, if any, see Cunningham, "A Requiem requiem (rĕk`wēəm, rē`–, rā`–) [Lat.,=rest], proper Mass for the souls of the dead, performed on All Souls' Day and at funerals. for Fulton Gold," 72 TAXES 365 (July 1994).  Kalman Hirsch, 115 F2d 656 (7th Cir. 1940)(25 AFTR 1038, 40-2 USTC [paragraph] 9791); A.L. Killian Co., 128 F2d 433 (8th Cir. 1942)(29 AFTR 528, 42-2 USTC [paragraph] 9487).  Dallas Transfer & Terminal Warehouse Co., 70 F2d 95 (5th Cir. 1934)(13 AFTR 930, 4 USTC [paragraph] 1270).  under Sec. 168(c)(1), nonresidential real property is depreciable depreciable
Of, relating to, or being a long-term tangible asset that is subject to depreciation. over 39 years; 1/39 = 0.02564. For the sake of simplicity, the Sec. 168(d)(4)(B) mid-month convention has been ignored.  Vincent Stackhouse, 441 F2d 465 (5th Cir. 1971)(27 AFTR2D 71-1211, 71-1 USTC [paragraph] 9352); see S. Rep. No. 96-1035, 96th Cong., 2d Sess. (1980), 1980-2 CB 631, n. 26.  Sec. 1366(d)(1)(A) provides an ordering rule such that the basis increase applies before the Sec. 108(b) tax attribute reduction, permitting an S shareholder to deduct suspended losses before the reduction rule is applied. Suspended losses in excess of adjusted basis would be subject to tax attribute reduction.  See, e.g., Tax Clinic, "Exempt COD Income Creates S Corp. Basis Adjustment," 24 The Tax Adviser 788 (December 1993).  Sec. 6662(d)(2)(b)(i) provides that the accuracy-related penalty will be reduced by the portion of an understatement attributable to the tax treatment of an item for which there is or was substantial authority.  Est. of Michael Newman Michael Newman (born 1957) was a Los Angeles County lifeguard for 20 years and a firefighter.
Newman started his career as a lifeguard at the age of 10 when he joined the junior lifeguards. He excelled at swimming and water sports and attended Pacific Palisades High School. , 934 F2d 426 (2d Cir. 1991)(67 AFTR2d 91-1116, 91-1 USTC [paragraph] 50,281).  The basis increase occurs before the deemed distribution. However, if the partner's allocable share of partnership debt is greater than his share of partnership income (as was the case in Babin), the deemed distribution will exceed the basis increase. This could result in gain recognition by the partner if the partner's basis were otherwise insufficient to support the deemed distribution.  The IRS calculated the taxpayer's share of COD income to be $3,952,514 ($5,270,019 x 0.75).