                         T.C. Memo. 1999-64



                       UNITED STATES TAX COURT



      WILLIAM C. WITZEL AND GENE E. WITZEL, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6592-97.                         Filed March 4, 1999.



     Wayne A. Cooper, for petitioners.

     John Q. Walsh, for respondent.



                         MEMORANDUM OPINION

     VASQUEZ, Judge:    Respondent determined a deficiency of

$602,119 in petitioners' 1993 Federal income tax.
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     After concessions,1 the sole issue for decision is whether

discharge of indebtedness (COD) income excluded under section

108(a) from the gross income of an S corporation passes through

to the shareholder of the S corporation as an item of income

under section 1366(a)(1)(A) and consequently increases the basis

of the shareholder's stock in the S corporation under section

1367.2

     The parties submitted this case fully stipulated.   Rule 122.

The stipulation of facts and the exhibits attached thereto are

incorporated herein by this reference.   At the time they filed

the petition, petitioners resided in Sandwich, Illinois.

Background

     At all relevant times, petitioner3 was the sole shareholder

of Water Products Co. of Illinois, Inc. (Water Products), an S

corporation.   In 1991, Water Products declared bankruptcy under

chapter 11 of the Bankruptcy Code.

     In 1992, Water Products realized COD income under section

61(a)(12) in the amount of $5,404,323.   As a result of its

     1
        Petitioners concede that respondent's adjustments to
their itemized deductions, deduction for exemptions, and
alternative minimum tax are correct if the Court concludes
petitioners are not entitled to increase the basis in their S
corporation stock.
     2
        All section references are to the Internal Revenue Code
in effect for the year in issue, and all Rule references are to
the Tax Court Rules of Practice and Procedure.
     3
         References to "petitioner" are to William C. Witzel.
                               - 3 -


bankruptcy, Water Products excluded the COD income from its gross

income.

     In 1992, petitioner had suspended losses (under section

1366(d)) from Water Products in the amount of $2,964,481 and a

zero basis in his Water Products stock before considering the

effect of the excluded COD income.

     For 1993, petitioners filed a joint Federal income tax

return.   On the return, petitioners increased the basis in the

Water Products stock by the amount of the excluded COD income

($5,404,323).   As a result of the increased basis, in 1993,

petitioners deducted suspended losses of $2,549,251.

Discussion

     Petitioners argue that they were entitled to increase their

basis in Water Products stock by their share of the excluded COD

income.   In Nelson v. Commissioner, 110 T.C. 114 (1998), we held

that COD income excluded by section 108(a) did not pass through

to an S corporation shareholder under section 1366(a)(1)(A);

therefore, the S corporation shareholder could not increase his

basis in the stock under section 1367(a)(1).

     Petitioners do not distinguish this case from Nelson.

Petitioners, however, contend that in Nelson we failed to

consider the following legal issues:   (1) The reduction of tax

attributes dictated by section 108(b) is an alternative to

taxation and does not mean that excluded COD income is not tax-
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exempt, (2) Congress' intent to treat all shareholders in S

corporations similarly under section 108(d)(7), and (3) the

dissimilarity in treatment between section 103 (exclusion of

State bond interest from gross income) and section 108.       We

disagree with petitioners.   In Nelson, we addressed all of these

arguments in detail.   Nelson v. Commissioner, supra at 122-125.

     We shall follow our recent Court-reviewed opinion.       We

therefore conclude that petitioners may not increase their basis

in the stock by the amount of the excluded COD income.

     To reflect the foregoing,

                                         Decision will be entered

                                 for respondent.
