Document: 531 U.S. 206121 S.Ct. 701148 L.Ed.2d 613 *NOTICE: This opinion is subject to formal revision before publication in the preliminary print of United States Reports. Readers are requested notify Reporter Decisions, Supreme Court States, Washington, D. C. 20543, any typographical or other errors, order that corrections may be made goes press.DAVID A. GITLITZ, et ux., al., PETITIONERSv.COMMISSIONER OF INTERNAL REVENUE No. 99-1295. SUPREME COURT THE UNITED STATES Argued October 2, 2000 Decided January 9, 2001 Syllabus Shareholders a corporation taxed under Subchapter S Internal Revenue Code elect "pass-through" taxation system, which corporation's profits pass through directly its shareholders on pro rata basis and reported shareholders' individual tax returns. 26 U.S.C. § 1366(a)(1)(A). To prevent double distributed income, increase their corporate bases by certain items income. §1367(a)(1)(A). Corporate losses deductions passed similar manner, §1366(a)(1)(A), stock debt decreased accordingly, §§1367(a)(2)(B), 1367(b)(2)(A). However, extent such exceed shareholder's debt, excess "suspended" until becomes large enough permit deduction. §§1366(d)(1)_(2). In 1991, an insolvent petitioners David Gitlitz Philip Winn were excluded entire discharge indebtedness amount from gross On returns, used share theory it was "item income" pass-through. They increased deduct deductions, including suspended ones previous years. With upward adjustments, they each able full losses. The Commissioner determined could not use denied loss deductions. Tax ultimately agreed. affirming, Tenth Circuit assumed item income pass-through, but held first had reduce attributes §108(b) only leftover basis. Because attribute reduced here (the net operating loss) equaled discharged amount, absorbed reduction at level nothing remained shareholders. Held: 1. statute's plain language establishes income," passes increases stock. Section 61(a)(12) states included And §108(a) provides ceases when insolvent, as contends. Not all see §1366(a)(1), so item's mere exclusion does imply Moreover, §§101 136 employ same construction exclude various even encourages reading would exempt Instead asserts unique because requires no economic outlay taxpayer's part, can identify statutory makes this distinction relevant. contrary, statute clear §108(a)'s alter character Specifically, §108(e) presumes always "income," question for §108 purposes whether includible Commissioner's contentions that, notwithstanding language, and, specifically, "tax-exempt §1366(a)(1)(A) do conclusion reached here. Pp. 5_9. 2. Pass-through performed §108(b). sequencing presented important. If shareholders, treated then debt; case remain take if after through, (up caused debt). Any remaining will amount. 108(b)(4)(A) expressly addresses question, directing reductions "shall determination imposed _ taxable year discharge." (Emphases added.) determine "tax imposed," shareholder must adjust his loss. Consequently adjustment Petitioners bases, losses, occur. equal have thus reduce. primary arguments Courts Appeals against provision rejected. 9_13. 182 F.3d 1143, reversed. ON WRIT CERTIORARI TO APPEALS FOR TENTH CIRCUIT Thomas, J., delivered Court, Rehnquist, Stevens, O'Connor, Scalia, Kennedy, Souter, Ginsburg, JJ., joined. Breyer, filed dissenting opinion. Opinion Justice Thomas Court. 1 assessed deficiencies Louise Eleanor nontaxed we answer two questions. First, decide (Code) permits taxpayers And, second, increase, occurs required attributes. 2 * Winn1 P. W. & A., Inc., elected subchapter Code, 13611379 (1994 ed. Supp. III). allows qualified corporations system subjected one taxation. See Bufferd v. Commissioner, 506 523, 525 (1993). §1366(a)(1)(A).2 upon distribution cor-poration §1367(a)(1)(A) identified §1366(a) cannot into account personal return corporation. §1366(d)(1) (Supp. those basis, §§1366(d)(1)(2) 3 realized $2,021,296 indebtedness. At time, $2,181,748. added balance sheet, 108(a) 108(d)(7)(A). (50 percent each) Petitioners' pass-through §1366(a)(1)(A). returns years been §1366(d). (including losses) totaled $1,010,648. adjustments $1,010,648 each, A.'s 4 petitioners' petitioned review deficiency determinations. initial opinion, granted relief therefore support increase. 73 TCM 3167 (1997), ¶97,286 RIA Memo withdrawn reissued, 75 1840 (1998), ¶98,071 TC. light Court's decision Nelson 110 T. 114 aff'd, 1152 (CA10 1999),3 however, motion reconsideration untaxed 5 affirmed. 1143 1999). It passthrough pursuant id., 1148, 1151, n. 7, §108(b), basis.4 explained (in level, Id., 1151. disagreed how treat corporation, compare Gaudiano 216 524, 535 (CA6 2000) (holding shareholders), cert. pending, 00_459, Witzel 200 496, 498 (CA7 (same), 99_1693, F.3d, 1150 (case below), with Farley, 202 198, 206 (CA3 reduced), 99_1675; also Pugh 213 1324, 1330 (CA11 basis), 00_242, certiorari. 529 1097 (2000). II 6 Before reach issue addressed Appeals-whether taxpayers' attributes-we address argument raised Commissioner.5 argues never Under statute, reject conclude indeed 7 generally 108(a)(1) express exception general rule: 8 "Gross include (but subsection) reason taxpayer if- 9 . 10 "(B) insolvent." 11 contends alters longer income." text structure theory. simply say insolvent. §1366(a)(1) (providing "items "tax-exempt" income: ." consequence manner suggested these sections §1366. us sweeping conclusion. among types receiving But unable relevant, certainly find none. 12 §108(e)(1) reads: 13 "Except otherwise provided section, there shall insolvency rule includes indebtedness." 14 entities actually need provide inclusion income; quite simply, entity necessarily 15 Notwithstanding argues, generally, §1366(a)(1)(A).6 merely codified "judicial exception," exception, considered See, e.g., Dallas Transfer Terminal Warehouse Co. 70 F.2d 95 (CA5 1934); Astoria Marine Construction 798 (1949). has since limited §108(e). 108(e) precludes relying understanding judicial §108. above, logic clearly establish although nevertheless 16 relies Treasury Regulation insolvent: 17 "Proceedings Bankruptcy Act. 18 "(1) Income virtue discharge, section Act (11 32), result adjudication bankruptcy, agreement creditors consummated Act, immediately thereafter liabilities value assets." CFR 1.61_12(b) 19 Even regulation read (countertextually) apply outside bankruptcy context, "[i]ncome realized." says about 20 Second, rather "tax-deferred" According future benefits, pay taxes forfeited Implicit labeling "tax-deferred," erroneous assumption 1366 applies mean worded broadly tax-deferred "could affect liability shareholder." Thus, none our III 21 Having concluded §1366, resolve 108(b)(1) "[t]he [§108(a)] applied [in section]." 108(b)(2) lists reduction. reduced, case, §108(b)(2)(A). 108(d)(7)(B) specifies reduction, (as held), debt. deductions.7 If, argue), Therefore, sequence steps determines deficient deducted 22 statute. directs chapter §1017(a) (applying affects property). §§1366, 1367 Supp Consequently, petitioners, remaining. They, therefore, 23 Although now abandoned reasoning below,8 provision. court expressed concern "at [the] level," §108(d)(7)(A), attributes.9 Gaudiano, 533. itself remains level. impose restriction. (emphasis added), altered shareholder. 24 courts discussed policy permitted reducing attributes, wrongly experience "double windfall": exempted paying indebtedness, previously 1147_1148. Code's receive concern.10 25 judgment Appeals, 27 ordered. NOTES: Each man joint wife. 1366(a)(1) provides: "In determining ends , taken corporation's- "(A) tax-exempt income), loss, deduction, credit separate treatment Nelson, normal rules. §108(d)(7)(A) "subsections (a) [and (b) §108] level" C., 121124. "The [section 108(a)(1)] throughout course litigation. during iteration several settled "final" one-that argued instead took place fully flow petitioners. relegated footnote Brief Appellee Nos. 98_9009 98_9010 (CA10), p. 33, 14. contends, dissent, mandates than some type words, excepts provisions corporations. 108(d)(7)(A) state level." very purpose §1363(b), §1363(a) (exempting tax), solely controlling liability, "there income) §1366(a)(1). Nothing suspends operation ordinary scenario, unclear precisely what happen below stated "absorbed" 1149. contrast, another suggested, albeit dictum, might still basis; it. 2000). We takes place. related abandonment particularly odd given predominated Appeals. attempt oral distance himself issue-the represented developed sua sponte, Tr. Oral Arg. 22_24, 27-it apparent brief supplied adopted. Compare, 28 ("First, temporarily set aside consequences PDW computes i.e., Third, indebtness eliminates against-and offset by-the flows 1366(a), 1367(a)" (citations omitted)), with, 1151 ("PDW A compute figure temporarily. calculate Finally, absorbs Winn"). Similar contention cases place, occur, rendering inoperative. particular, all, Certainly condition ability Likewise, similarly situated possibility §§108(b)(2)(B)(G), reduced. benefit arises part personally solvent. aware instance benefits solvent entity. Between 1982 1984, occurred Revision 1982, Pub. L. 97_354, §3(e), 96 Stat. 1689. provision, paralleled current partnerships partner 108(d)(6), prevented benefiting insolvency. Congress amended Reform 98_369, §721(b), 98 966. direct amendment §108's exclusion. dissenting. 29 I agree majority's footnotes 10. basic 108-the excludes "gross "insolvent" taxpayer, cancellation (COD) generate. As majority acknowledges, ante, 6, contains subsection sets forth special exception. entitled "Special rules corporation," says: 30 Certain 31 subsections (a), (b), (c), (g) 32 reads literally exclusive, both COD (§108(a)) (§108(b)) Hence help unavailable 33 should way preventing flow-through 27. He points House Committee, apparently thought, §108, correct. H. R. Rep. 103_111, pp. 624_625 (1993) ("[T]he (sec. 108(d)(7)). adjusted level"). least commentator believes same. Loebl, Does Excluded Insolvent Corporation Increase Basis Shareholders' Stock?, 52 U. Fla. Rev. 957, 981_988 Lockhart Duffy, Rules Shareholder Stock Basis, Wm. Mitchell 287 (1999). 34 finds literal, exclusive §108(d)(7)(A)'s fact close significant loophole. That loophole-preserved majority-would grant form permission thereby sheltering other, unrelated tax. 497 (Posner, J.) ("It hard understand rationale using exemption avoid covered exempt"). often increases, inconsistent congressional intent "price" (attribute reduction), Lipton, Different Adopt Approaches Impact Corporations, 92 J. Tax. 207 (2000), COD. Further, deduction-related different identically taxpayers, depending single split segments, canceled year. For example, interpretation, $1 million Taxpayer year, permitting shelter reduces five annual cancellations $200,000 create shelter. Timing 35 acknowledges concerns confesses ignorance "other entity," claims mandated disregard consequences. Ante, 13, difficult, why interpret treating differently, words "[i]n manner." 98_432, pt. 1640 (1984). more difficult why, "plain language" admits either ignore Gillette Motor Transport, 364 130, 134_135 (1960) (abandoning literal meaning 1221 (1958 ed.) consistent intent). Accord, G. Lake, 356 260, 264_267 (1958); Corn Products Refining 350 46, 51_52 (1955); Hort 313 28, 30_31 (1941). 36 sides produce ambiguity, certainty. things being equal, ambiguous statutes closing, maintaining, loopholes. Such appropriate Congress' likely intent. Here, for, far am aware, interpretation neither cause tax-related harm nor anomaly. argue linguistic inconsistency, point hobby limitations §183 determining" allowable while, presumably, nonetheless deduction Treas. Reg. §1.183_1(f), 1.183_1(f) concerned "application" exclusion, "determining" Regardless, regulation's like three appearances formulation "applied" "determined" occur contexts interpretation. 49(a)(1)(E)(ii)(I) (determining financing recourse financing); 264(f)(5)(B) ed., IV) allocate interest expense portions insurance policies); 302(e)(1)(A) partial liquidation). militating favor found them. 37 majority, reduction" "suspen[d] rules" "does `at level.' " explain nonexclusive (where, here, results "practical equivalent [a] deduction," Charles Ilfeld Hernandez, 292 62, 68 (1934)). Skelly Oil Co., 394 678, 684 (1969) (requiring "clear declaration Congress" circumstances). contend having effect, alternative, best whole. contrary regarding effect. which, reasons stated, respectfully dissent

Category: 11