Section of Taxation Publications
  VOL. 54
NO. 3
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

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. 


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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