Summary
On remand from the Supreme Court, the Tenth Circuit vacated its prior judgment concerning whether discharge-of-indebtedness income of an S corporation passes through to shareholders before or after tax-attribute reduction under 26 U.S.C. § 108(b). The court remanded to the Tax Court with directions to enter judgment for the taxpayers because the deficiency determinations depended exclusively on the sequencing issue resolved by the Supreme Court.
Topics
Practice areas
Questions Presented
- Whether the Tenth Circuit's prior judgment should be vacated and the case remanded to the Tax Court after the Supreme Court held that pass-through of an S corporation's untaxed discharge-of-indebtedness income occurs before reduction of the corporation's tax attributes under 26 U.S.C. § 108(b).
- Whether the taxpayers were entitled to judgment in their favor because the deficiency determinations depended exclusively on the sequencing issue resolved by the Supreme Court.
Holdings
- Under the Supreme Court's controlling decision, pass-through of an S corporation's untaxed discharge-of-indebtedness income to shareholders occurs before reduction of the corporation's tax attributes under 26 U.S.C. § 108(b).
- The Tenth Circuit vacated its prior judgment and remanded to the Tax Court with directions to enter judgment in favor of the taxpayers.
Key quotations
“We therefore VACATE our prior judgment and REMAND the case to the Tax Court with directions to enter judgment in favor of taxpayers.” (at 771)
“This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel.” (at 771)
Factual background
The taxpayers used untaxed discharge of indebtedness from an S corporation to increase their bases in the corporation's stock. The Commissioner determined that the taxpayers had tax deficiencies, and the taxpayers challenged those determinations. The validity of the deficiencies depended on whether the discharge-of-indebtedness income passed through to shareholders before or after reduction of the corporation's tax attributes.
Procedural history
The Commissioner assessed tax deficiencies against the Gitlitzes and Winns based on their use of untaxed discharge of indebtedness to increase their S corporation stock bases. The Tax Court upheld the deficiencies, and the Tenth Circuit affirmed, holding that attribute reduction under 26 U.S.C. § 108(b) preceded pass-through to shareholders. The Supreme Court reversed and held that pass-through occurs before attribute reduction, then remanded to the Tenth Circuit. Because the deficiency determinations turned exclusively on that sequencing issue, the Tenth Circuit vacated its prior judgment and remanded to the Tax Court to enter judgment for the taxpayers.
Remand instructions
The prior Tenth Circuit judgment was vacated, and the case was remanded to the United States Tax Court with directions to enter judgment in favor of the taxpayers.