Assessing S Corporation Cancellation of Debt Income on Shareholders' Income and Basis in the S Corporation's Stock: Gitlitz v. Commissioner
Julie F. Bell
In Gitlitz v. Commissioner, the Supreme Court resolved the divergence of opinion in four of the federal circuit courts regarding the pass through of cancellation of debt (“COD”) income to the shareholders of an insolvent S corporation. The Supreme Court, in reaching its decision, held that COD income, as an “item of income,” passes through to the S corporation’s shareholder and increases his basis in the stock. The Court then decided that the COD income passes through to the shareholder and increases his basis in the S corporation’s stock before the tax attribute reduction is made at the corporate level.Part I of this Note details the Code provisions at issue and provides a summary of the facts of the Gitlitz case. Part II explains the decisions of the three other federal circuit court cases. Part III discusses the Supreme Court’s opinion in Gitlitz. Finally, Part IV analyzes the decision of the Supreme Court and concludes that the Court’s majority opinion rests on sound ground.