Letter ruling denies step-up basis of S stock through COD income.

• Author: Tamer, Timothy J.
• Position: Cancellation of indebtedness - Brief Article

The Tax Clinic item, "Exempt COD Income Creates S Corp. Basis Adjustment," TTA, Dec. 1993, at 788, pointed out the possibility of increasing a shareholder's basis in S stock by cancellation of debt (COD) income excluded from gross income under Sec. 108. This increased stock basis, in turn, would allow the shareholder to recognize losses suspended due to basis limitations as well as any operating losses for the year in which the debt cancellation occurs.

However, this item also noted that the IRS might attempt to preclude an addition to the basis of S corporation stock for COD income.

Subsequently, Letter Ruling (TAM) 9423003 concluded:

Discharge of indebtedness income excluded from gross income under [sections]108(a) does not pass through to S corporation shareholders and is not a separately stated item of tax-exempt income within the meaning of the parenthetical of [sections]1366(a) for the...