Gitlitz v. Commissioner, 531 U.S. 206, 121 S. Ct. 701 (2001), rev'g 182 F.3d 1143 (10th Cir. 1999);

COURT SAYS TAXPAYERS PERMITTED TO INCREASE BASIS IN THEIR
“S” CORPORATION STOCK BY DISCHARGE OF INDEBTEDNESS
The case (Gitlitz, et al. v. Commissioner of Internal Revenue, 531 U.S. ___ [2001]) involves a complex tax issue which was addressed by the United States Tax Court and five different Courts of Appeals. Because the Courts of Appeals were in disagreement, the U.S. Supreme Court agreed to resolve the dispute. The Supreme Court’s January 9, 2001 decision overrules the opinions of the U.S. Tax Court and the 10th Circuit Court of Appeals, both of which had been unanimous in favor of the IRS.

“This is one of three or four favorable U.S. Supreme Court decisions for taxpayers in the last 10 years, as compared to about a dozen losses,” said Darrell Hallett of the Seattle law firm, Chicoine & Hallett, PS, (www.chicoine-hallett.com) who argued the case before the Court on October 2, 2000. “We expect this case to have sweeping effects,” he said. “The government stated that it has more than 30 other cases raising this same issue currently pending in the courts, and many more may be on audit before the IRS,” Hallett said. “This critical clarification of the Tax Code by the Court should save taxpayers millions of dollars both in actual taxes and litigation costs,” he added.

In its 8-1 decision, the Court held that the Internal Revenue Code permits taxpayers to increase the basis in their S corporation stock by the amount of an S Corporation’s discharge of indebtedness excluded from gross income. Justice Thomas delivered the opinion of the Court. Justice Breyer filed the only dissenting opinion.