GITLITZ et al. v. COMMISSIONER OF INTERNAL REVENUE

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206 OCTOBER TERM, 2000
Syllabus
GITLITZ et al. v. COMMISSIONER OF
INTERNAL REVENUE
certiorari to the united states court of appeals for
the tenth circuit
No. 99–1295. Argued October 2, 2000—Decided January 9, 2001
Shareholders of a corporation taxed under Subchapter S of the Internal
Revenue Code may elect a “pass-through” taxation system, under which
the corporation’s profits pass through directly to its shareholders on
a pro rata basis and are reported on the shareholders’ individual tax
returns. 26 U. S. C. § 1366(a)(1)(A). To prevent double taxation of
distributed income, shareholders may increase their corporate bases
by certain items of income. § 1367(a)(1)(A). Corporate losses and de-
ductions are passed through in a similar manner, § 1366(a)(1)(A), and the
shareholders’ bases in the S corporation’s stock and debt are decreased
accordingly, §§ 1367(a)(2)(B), 1367(b)(2)(A). However, to the extent that
such losses and deductions exceed a shareholder’s basis in the S corpora-
tion’s stock and debt, the excess is “suspended” until that basis becomes
large enough to permit the deduction. §§ 1366(d)(1)–(2). In 1991, an
insolvent S corporation in which petitioners David Gitlitz and Philip
Winn were shareholders excluded its entire discharge of indebtedness
amount from gross income. On their tax returns, petitioners used their
pro rata share of the discharge amount to increase their bases in the
corporation’s stock on the theory that it was an “item of income” sub-
ject to pass-through. They used their increased bases to deduct corpo-
rate losses and deductions, including suspended ones from previous
years. With the upward basis adjustments, they were each able to de-
duct the full amount of their pro rata share of the corporation’s losses.
The Commissioner determined that they could not use the corpora-
tion’s discharge of indebtedness to increase their bases in the stock
and denied their loss deductions. The Tax Court ultimately agreed.
In affirming, the Tenth Circuit assumed that excluded discharge of
indebtedness is an item of income subject to pass-through, but held that
the discharge amount first had to be used to reduce certain tax attrib-
utes of the S corporation under § 108(b) and that only the leftover
amount could be used to increase basis. Because the tax attribute to
be reduced here (the corporation’s net operating loss) equaled the dis-
charged debt amount, that entire amount was absorbed by the reduction
at the corporate level and nothing remained to be passed through to
the shareholders.

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Syllabus
Held:
1. The statute’s plain language establishes that excluded discharged
debt is an “item of income,” which passes through to shareholders and
increases their bases in an S corporation’s stock. Section 61(a)(12)
states that discharge of indebtedness is included in gross income. And
§ 108(a) provides only that the discharge ceases to be included in gross
income when the S corporation is insolvent, not that it ceases to be an
item of income, as the Commissioner contends. Not all items of income
are included in gross income, see § 1366(a)(1), so an item’s mere exclu-
sion from gross income does not imply that the amount ceases to be
an item of income. Moreover, §§ 101 through 136 employ the same con-
struction to exclude various items from gross income, but not even
the Commissioner encourages a reading that would exempt all such
items from pass-through. Instead the Commissioner asserts that dis-
charge of indebtedness is unique because it requires no economic out-
lay on the taxpayer’s part, but can identify no statutory language that
makes this distinction relevant. On the contrary, the statute makes
clear that § 108(a)’s exclusion does not alter the character of discharge
of indebtedness as an item of income. Specifically, § 108(e) presumes
that such discharge is always “income,” and that the only question for
§ 108 purposes is whether it is includible in gross income. The Commis-
sioner’s contentions that, notwithstanding the statute’s plain language,
excluded discharge of indebtedness is not income and, specifically, that
it is not “tax-exempt income” under § 1366(a)(1)(A) do not alter the con-
clusion reached here. Pp. 212–216.
2. Pass-through is performed before the reduction of an S corpora-
tion’s tax attributes under § 108(b). The sequencing question presented
here is important. If attribute reduction is performed before the dis-
charge of indebtedness is passed through to the shareholders, the share-
holders’ losses that exceed basis are treated as the corporation’s net
operating loss and are then reduced by the amount of the discharged
debt; in this case no suspended losses would remain that would permit
petitioners to take deductions. However, if it is performed after the
discharged debt income is passed through, then the shareholders would
be able to deduct their losses (up to the amount of the increase in basis
caused by the discharged debt). Any suspended losses remaining then
will be treated as the S corporation’s net operating loss and reduced by
the discharged debt amount. Section 108(b)(4)(A) expressly addresses
the sequencing question, directing that the attribute reductions “shall
be made after the determination of the tax imposed . . . for the taxable
year of the discharge.” (Emphases added.) In order to determine the
“tax imposed,” a shareholder must adjust his basis in S corporation
stock and pass through all items of income and loss. Consequently the

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208 GITLITZ v. COMMISSIONER
Opinion of the Court
attribute reduction must be made after the basis adjustment and pass-
through. Petitioners must pass through the discharged debt, increase
corporate bases, and then deduct their losses, all before any attribute
reduction could occur. Because their basis increase is equal to their
losses, they have no suspended losses remaining and thus have no net
operating losses to reduce. The primary arguments made in Courts of
Appeals against this reading of the sequencing provision are rejected.
Pp. 216–220.
182 F. 3d 1143, reversed.
Thomas, J., delivered the opinion of the Court, in which Rehnquist,
C. J., and Stevens, O’Connor, Scalia, Kennedy, Souter, and Gins-
burg, JJ., joined. Breyer, J., filed a dissenting opinion, post, p. 220.
Darrell D. Hallett argued the cause for petitioners. With
him on the briefs were John M. Colvin and Robert J.
Chicoine.
Kent L. Jones argued the cause for respondent. With
him on the brief were Solicitor General Waxman, Acting
Assistant Attorney General Junghans, Deputy Solicitor
General Wallace, Teresa E. McLaughlin, and Edward T.
Perelmuter.*
Justice Thomas delivered the opinion of the Court.
The Commissioner of Internal Revenue assessed tax defi-
ciencies against petitioners David and Louise Gitlitz and
Philip and Eleanor Winn because they used nontaxed dis-
charge of indebtedness to increase their bases in S corpora-
tion stock and to deduct suspended losses. In this case we
must answer two questions. First, we must decide whether
the Internal Revenue Code (Code) permits taxpayers to in-
crease bases in their S corporation stock by the amount of
an S corporation’s discharge of indebtedness excluded from
gross income. And, second, if the Code permits such an in-
*Richard M. Lipton and Theodore R. Bots filed a brief for the Real
Estate Roundtable as amicus curiae urging reversal.

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Opinion of the Court
crease, we must decide whether the increase occurs before
or after taxpayers are required to reduce the S corporation’s
tax attributes.
I
David Gitlitz and Philip Winn 1 were shareholders of
P. D. W. & A., Inc., a corporation that had elected to be taxed
under Subchapter S of the Code, 26 U. S. C. §§ 1361–1379
(1994 ed. and Supp. III). Subchapter S allows shareholders
of qualified corporations to elect a “pass-through” taxation
system under which income is subjected to only one level of
taxation. See Bufferd v. Commissioner, 506 U. S. 523, 525
(1993). The corporation’s profits pass through directly to its
shareholders on a pro rata basis and are reported on the
shareholders’ individual tax returns. See § 1366(a)(1)(A).2
To prevent double taxation of income upon distribution from
the corporation to the shareholders, § 1367(a)(1)(A) permits
shareholders to increase their corporate bases by items of
income identified in § 1366(a) (1994 ed. and Supp. III). Cor-
porate losses and deductions are passed through in a similar
manner, see § 1366(a)(1)(A), and the shareholders’ bases in
the S corporation’s stock and debt are decreased accordingly,
see §§ 1367(a)(2)(B), 1367(b)(2)(A). However, a shareholder
cannot take corporate losses and deductions into account on
his personal tax return to the extent that such items exceed
his basis in the stock and debt of the S corporation. See
1 Each man filed a joint tax return with his wife.
2 Section 1366(a)(1) provides:
“In determining the tax under this chapter of a shareholder for the share-
holder’s taxable year in which the taxable year of the S corporation
ends . . . , there shall be taken into account the shareholder’s pro rata
share of the corporation’s—
“(A) items of income (including tax-exempt income), loss, deduction, or
credit the separate treatment of which could affect the liability for tax of
any shareholder . . . .”

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§ 1366(d)(1) (Supp. III). If those items exceed the basis, the
excess is “suspended” until the shareholder’s basis becomes
large enough to permit the deduction. See §§ 1366(d)(1), (2)
(1994 ed. and Supp. III).
In 1991, P. D. W. & A. realized $2,021,296 of discharged
indebtedness. At the time, the corporation was insolvent in
the amount of $2,181,748. Because it was insolvent even
after the discharge of indebtedness was added to its balance
sheet, P. D. W. & A. excluded the entire discharge of indebt-
edness amount from gross income under 26 U. S. C. §§ 108(a)
and 108(d)(7)(A). On their tax returns, Gitlitz and Winn in-
creased their bases in P. D. W. & A. stock by their pro rata
share (50 percent each) of the amount of the corporation’s
discharge of indebtedness. Petitioners’ theory was that the
discharge of indebtedness was an “item of income” subject
to pass-through under § 1366(a)(1)(A). They used their in-
creased bases to deduct on their personal tax returns cor-
porate losses and deductions, including losses and deduc-
tions from previous years that had been suspended under
§ 1366(d). Gitlitz and Winn each had losses (including sus-
pended losses and operating losses) that totaled $1,010,648.
With the upward basis adjustments of $1,010,648 each, Gitlitz
and Winn were each able to deduct the full amount of their
pro rata share of P. D. W. & A.’s losses.
The Commissioner determined that petitioners could not
use P. D. W. & A.’s discharge of indebtedness to increase
their bases in the stock and denied petitioners’ loss deduc-
tions. Petitioners petitioned the Tax Court to review the
deficiency determinations. The Tax Court, in its initial
opinion, granted relief to petitioners and held that the dis-
charge of indebtedness was an “item of income” and there-
fore could support a basis increase. See Winn v. Commis-
sioner, 73 TCM 3167 (1997), ¶ 97,286 RIA Memo withdrawn
and reissued, 75 TCM 1840 (1998), ¶ 98,071 RIA Memo TC.
In light of the Tax Court’s decision in Nelson v. Commis-

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sioner, 110 T. C. 114 (1998), aff ’d, 182 F. 3d 1152 (CA10 1999),3
however, the Tax Court granted the Commissioner’s motion
for reconsideration and held that shareholders may not use
an S corporation’s untaxed discharge of indebtedness to in-
crease their bases in corporate stock. See Winn v. Commis-
sioner, 75 TCM 1840 (1998), ¶ 98,071 RIA Memo TC.
The Court of Appeals affirmed. See 182 F. 3d 1143 (CA10
1999). It assumed that excluded discharge of indebtedness
is an item of income subject to pass-through to shareholders
pursuant to § 1366(a)(1)(A), id., at 1148, 1151, n. 7, but held
that the discharge of indebtedness amount first had to be
used to reduce certain tax attributes of the S corporation
under § 108(b), and that only the leftover amount could be
used to increase basis.4 The Court of Appeals explained
that, because the tax attribute to be reduced (in this case
the corporation’s net operating loss) was equal to the amount
of discharged debt, the entire amount of discharged debt
was absorbed by the reduction at the corporate level, and
nothing remained of the discharge of indebtedness to be
passed through to the shareholders under § 1366(a)(1)(A).
Id., at 1151. Because Courts of Appeals have disagreed on
how to treat discharge of indebtedness of an insolvent S cor-
poration, compare Gaudiano v. Commissioner, 216 F. 3d 524,
535 (CA6 2000) (holding that tax attributes are reduced be-
fore excluded discharged debt income is passed through to
shareholders), cert. pending, No. 00–459; Witzel v. Commis-
sioner, 200 F. 3d 496, 498 (CA7 2000) (same), cert. pending,
3 In Nelson, the Tax Court held that excluded discharge of indebtedness
does not pass through to an S corporation’s shareholders because § 108
is an exception to normal S corporation pass-through rules. Specifically,
the court held that, because § 108(d)(7)(A) requires that “subsections (a)
[and (b) of § 108] shall be applied at the corporate level” in the case of an
S corporation, it precludes any pass-through of the discharge of indebted-
ness to the shareholder level. See Nelson, 110 T. C., at 121–124.
4 Section 108(b)(1) reads: “The amount excluded from gross income
under [§ 108(a)(1)] shall be applied to reduce the tax attributes of the
taxpayer . . . .”

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No. 99–1693; and 182 F. 3d, at 1150 (case below), with United
States v. Farley, 202 F. 3d 198, 206 (CA3 2000) (holding that
excluded discharged debt income is passed through to share-
holders before tax attributes are reduced), cert. pending,
No. 99–1675 [Reporter’s Note: See post, p. 1111]; see also
Pugh v. Commissioner, 213 F. 3d 1324, 1330 (CA11 2000)
(holding that excluded discharged debt income is sub-
ject to pass-through and can increase basis), cert. pending,
No. 00–242, we granted certiorari. 529 U. S. 1097 (2000).
II
Before we can reach the issue addressed by the Court of
Appeals—whether the increase in the taxpayers’ corporate
bases occurs before or after the taxpayers are required to
reduce the S corporation’s tax attributes—we must address
the argument raised by the Commissioner.5 The Commis-
sioner argues that the discharge of indebtedness of an insol-
vent S corporation is not an “item of income” and thus never
passes through to shareholders. Under a plain reading of
the statute, we reject this argument and conclude that ex-
cluded discharged debt is indeed an “item of income,” which
passes through to the shareholders and increases their bases
in the stock of the S corporation.
5 The Commissioner has altered his arguments throughout the course of
this litigation. According to the Tax Court, during the first iteration of
this case the Commissioner made several arguments but then settled on a
“final” one—that the discharge of indebtedness of the insolvent S corpora-
tion was not an “item of income,” see 73 TCM 3167 (1997), ¶ 97,286 RIA
Memo TC. In the Court of Appeals, the Commissioner argued instead
that, because any pass-through of excluded discharge of indebtedness to
petitioners took place after any reduction of tax attributes and by then
the income would have been fully absorbed by the tax attributes, no dis-
charged debt remained to flow through to petitioners. The Commissioner
relegated to a footnote his argument that discharge of indebtedness is not
an “item of income.” See Brief for Appellee in Nos. 98–9009 and 98–9010
(CA10), p. 33, n. 14.

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Section 61(a)(12) states that discharge of indebtedness
generally is included in gross income. Section 108(a)(1) pro-
vides an express exception to this general rule:
“Gross income does not include any amount which (but
for this subsection) would be includible in gross income
by reason of the discharge . . . of indebtedness of the
taxpayer if—
. . . . .
“(B) the discharge occurs when the taxpayer is
insolvent.”
The Commissioner contends that this exclusion from gross
income alters the character of the discharge of indebtedness
so that it is no longer an “item of income.” However, the
text and structure of the statute do not support the Commis-
sioner’s theory. Section 108(a) simply does not say that dis-
charge of indebtedness ceases to be an item of income when
the S corporation is insolvent. Instead it provides only that
discharge of indebtedness ceases to be included in gross in-
come. Not all items of income are included in gross income,
see § 1366(a)(1) (providing that “items of income,” including
“tax-exempt” income, are passed through to shareholders),
so mere exclusion of an amount from gross income does not
imply that the amount ceases to be an item of income.
Moreover, §§ 101 through 136 employ the same construction
to exclude various items from gross income: “Gross income
does not include . . . .” The consequence of reading this
language in the manner suggested by the Commissioner
would be to exempt all items in these sections from pass-
through under § 1366. However, not even the Commissioner
encourages us to reach this sweeping conclusion. Instead
the Commissioner asserts that discharge of indebtedness is
unique among the types of items excluded from gross income
because no economic outlay is required of the taxpayer re-

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Opinion of the Court
ceiving discharge of indebtedness. But the Commissioner is
unable to identify language in the statute that makes this
distinction relevant, and we certainly find none.
On the contrary, the statute makes clear that § 108(a)’s
exclusion does not alter the character of discharge of indebt-
edness as an item of income. Specifically, § 108(e)(1) reads:
“Except as otherwise provided in this section, there
shall be no insolvency exception from the general rule
that gross income includes income from the discharge
of indebtedness.”
This provision presumes that discharge of indebtedness is
always “income,” and that the only question for purposes of
§ 108 is whether it is includible in gross income. If discharge
of indebtedness of insolvent entities were not actually “in-
come,” there would be no need to provide an exception to
its inclusion in gross income; quite simply, if discharge of
indebtedness of an insolvent entity were not “income,” it
would necessarily not be included in gross income.
Notwithstanding the plain language of the statute, the
Commissioner argues, generally, that excluded discharge
of indebtedness is not income and, specifically, that it is
not “tax-exempt income” under § 1366(a)(1)(A).6 First, the
6 The Commissioner also contends, as does the dissent, that because
§ 108(d)(7)(A) mandates that the discharged debt amount be determined
and applied to reduce tax attributes “at the corporate level,” rather than
at the shareholder level, the discharged debt, even if it is some type of
income, simply cannot pass through to shareholders. In other words, the
Commissioner contends that § 108(d)(7)(A) excepts excluded discharged
debt from the general pass-through provisions for S corporations. How-
ever, § 108(d)(7)(A) merely directs that the exclusion from gross income
and the tax attribute reduction be made at the corporate level. Section
108(d)(7)(A) does not state or imply that the debt discharge provisions
shall apply only “at the corporate level.” The very purpose of Subchap-
ter S is to tax at the shareholder level, not the corporate level. Income
is determined at the S corporation level, see § 1363(b), not in order to tax

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Commissioner argues that § 108 merely codified the “judicial
insolvency exception,” and that, under this exception, dis-
charge of indebtedness of an insolvent taxpayer was not con-
sidered income. The insolvency exception was a rule that
the discharge of indebtedness of an insolvent taxpayer was
not taxable income. See, e. g., Dallas Transfer & Terminal
Warehouse Co. v. Commissioner, 70 F. 2d 95 (CA5 1934);
Astoria Marine Construction Co. v. Commissioner, 12 T. C.
798 (1949). But the exception has since been limited by
§ 108(e). Section 108(e) precludes us from relying on any un-
derstanding of the judicial insolvency exception that was not
codified in § 108. And as explained above, the language and
logic of § 108 clearly establish that, although discharge of
indebtedness of an insolvent taxpayer is not included in
gross income, it is nevertheless income.
The Commissioner also relies on a Treasury Regulation to
support his theory that no income is realized from the dis-
charge of the debt of an insolvent:
“Proceedings under Bankruptcy Act.
“(1) Income is not realized by a taxpayer by virtue of
the discharge, under section 14 of the Bankruptcy Act
(11 U. S. C. 32), of his indebtedness as the result of an
adjudication in bankruptcy, or by virtue of an agreement
among his creditors not consummated under any provi-
sion of the Bankruptcy Act, if immediately thereafter
the taxpayer’s liabilities exceed the value of his assets.”
26 CFR § 1.61–12(b) (2000).
Even if this regulation could be read (countertextually) to
apply outside the bankruptcy context, it merely states that
the corporation, see § 1363(a) (exempting an S corporation from income
tax), but solely to pass through to the S corporation’s shareholders the
corporation’s income. Thus, the controlling provision states that, in de-
termining a shareholder’s liability, “there shall be taken into account the
shareholder’s pro rata share of the corporation’s . . . items of income (in-
cluding tax-exempt income) . . . .” § 1366(a)(1). Nothing in § 108(d)(7)(A)
suspends the operation of these ordinary pass-through rules.

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“[i]ncome is not realized.” The regulation says nothing
about whether discharge of indebtedness is income subject
to pass-through under § 1366.
Second, the Commissioner argues that excluded discharge
of i ndebtedness is not “ t ax-exempt” i ncome under
§ 1366(a)(1)(A), but rather “tax-deferred” income. Accord-
ing to the Commissioner, because the taxpayer is required
to reduce tax attributes that could have provided future tax
benefits, the taxpayer will pay taxes on future income that
otherwise would have been absorbed by the forfeited tax
attributes. Implicit in the Commissioner’s labeling of such
income as “tax-deferred,” however, is the erroneous assump-
tion that § 1366(a)(1)(A) does not include “tax-deferred”
income. Section 1366 applies to “items of income.” This
section expressly includes “tax-exempt” income, but this in-
clusion does not mean that the statute must therefore ex-
clude “tax-deferred” income. The section is worded broadly
enough to include any item of income, even tax-deferred in-
come, that “could affect the liability for tax of any share-
holder.” § 1366(a)(1)(A). Thus, none of the Commissioner’s
contentions alters our conclusion that discharge of indebted-
ness of an insolvent S corporation is an item of income for
purposes of § 1366(a)(1)(A).
III
Having concluded that excluded discharge of indebtedness
is an “item of income” and is therefore subject to pass-
through to shareholders under § 1366, we must resolve the
sequencing question addressed by the Court of Appeals—
whether pass-through is performed before or after the re-
duction of the S corporation’s tax attributes under § 108(b).
Section 108(b)(1) provides that “[t]he amount excluded from
gross income under [§ 108(a)] shall be applied to reduce the
tax attributes of the taxpayer as provided [in this section].”
Section 108(b)(2) then lists the various tax attributes to be
reduced in the order of reduction. The first tax attribute to

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Opinion of the Court
be reduced, and the one at issue in this case, is the net oper-
ating loss. See § 108(b)(2)(A). Section 108(d)(7)(B) speci-
fies that, for purposes of attribute reduction, the sharehold-
ers’ suspended losses for the taxable year of discharge are
to be treated as the S corporation’s net operating loss. If
tax attribute reduction is performed before the discharge of
indebtedness is passed through to the shareholders (as the
Court of Appeals held), the shareholders’ losses that exceed
basis are treated as the corporation’s net operating loss and
are then reduced by the amount of the discharged debt. In
this case, no suspended losses would remain that would
permit petitioners to take deductions.7 If, however, attri-
bute reduction is performed after the discharged debt in-
come is passed through (as petitioners argue), then the
shareholders would be able to deduct their losses (up to the
amount of the increase in basis caused by the discharged
debt). Any suspended losses remaining then will be treated
as the S corporation’s net operating loss and will be reduced
by the amount of the discharged debt. Therefore, the se-
quence of the steps of pass-through and attribute reduction
determines whether petitioners here were deficient when
they increased their bases by the discharged debt amount
and deducted their losses.
7 Under this scenario, the shareholders’ losses would be reduced by the
discharge of indebtedness. However, it is unclear precisely what would
happen to the discharge of indebtedness. The Court of Appeals below
stated that the discharged debt would be “absorbed” by the reduction to
the extent of the net operating loss and that therefore only the excess
excluded discharged debt would remain to pass through to the sharehold-
ers. 182 F. 3d 1143, 1149 (CA10 1999). In contrast, another Court of
Appeals suggested, albeit in dictum, that the full amount of the discharge
might still pass through to the shareholder and be used to increase basis;
the discharged debt amount would reduce the net operating loss but would
not be absorbed by it. Witzel v. Commissioner, 200 F. 3d 496, 498 (CA7
2000). We need not resolve this issue because we conclude that the dis-
charge of indebtedness passes through before any attribute reduction
takes place.

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The sequencing question is expressly addressed in the
statute. Section 108(b)(4)(A) directs that the attribute re-
ductions “shall be made after the determination of the tax
imposed by this chapter for the taxable year of the dis-
charge.” (Emphases added.) See also § 1017(a) (applying
the same sequencing when § 108 attribute reduction affects
basis of corporate property). In order to determine the
“tax imposed,” an S corporation shareholder must adjust his
basis in his corporate stock and pass through all items of
income and loss. See §§ 1366, 1367 (1994 ed. and Supp. III).
Consequently, the attribute reduction must be made after
the basis adjustment and pass-through. In the case of
petitioners, they must pass through the discharged debt,
increase corporate bases, and then deduct their losses, all
before any attribute reduction could occur. Because their
basis increase is equal to their losses, petitioners have no
suspended losses remaining. They, therefore, have no net
operating losses to reduce.
Although the Commissioner has now abandoned the rea-
soning of the Court of Appeals below,8 we address the pri-
8 The Commissioner has abandoned his argument related to the sequenc-
ing issue before this Court. This abandonment is particularly odd given
that the sequencing issue predominated in the Commissioner’s argument
to the Court of Appeals. Notwithstanding the Commissioner’s attempt
at oral argument to distance himself from the reasoning of the Court of
Appeals on this issue—the Commissioner represented to us that the Court
of Appeals developed its reading of the statute sua sponte, Tr. of Oral
Arg. 22–24, 27—it is apparent from the Commissioner’s brief in the Court
of Appeals that the Commissioner supplied the very sequencing theory
that the Court of Appeals adopted. Compare, e. g., Brief for Appellee in
Nos. 98–9009 and 98–9010 (CA10), p. 28 (“First, the discharge of indebted-
ness income that is excluded under Section 108(a) at the corporate level is
temporarily set aside and has no tax consequences . . . . Second, PDW &
A computes its tax attributes, i. e., taxpayers’ suspended losses. Third,
the excluded discharge of indebtness income is applied against and elimi-
nates the suspended losses. Because the excluded income is applied
against—and offset by—the suspended losses, no item of income flows
through to taxpayers under Section 1366(a), and no upward basis adjust-

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mary arguments made in the Courts of Appeals against peti-
tioners’ reading of the sequencing provision. First, one
court has expressed the concern that, if the discharge of
indebtedness is passed through to the shareholder before the
tax attributes are reduced, then there can never be any dis-
charge of indebtedness remaining “at the corporate level,”
§ 108(d)(7)(A), by which to reduce tax attributes.9 Gaudi-
ano, 216 F. 3d, at 533. This concern presumes that tax at-
tributes can be reduced only if the discharge of indebtedness
itself remains at the corporate level. The statute, however,
does not impose this restriction. Section 108(b)(1) requires
only that the tax attributes be reduced by “[t]he amount
excluded from gross income” (emphasis added), and that
amount is not altered by the mere pass-through of the in-
come to the shareholder.
Second, courts have discussed the policy concern that, if
shareholders were permitted to pass through the discharge
of indebtedness before reducing any tax attributes, the
shareholders would wrongly experience a “double windfall”:
ment is made under Section 1367(a)” (citations omitted)), with, e. g., 182
F. 3d, at 1151 (“PDW & A first must compute its discharge of indebtedness
income and set this figure aside temporarily. The corporation then must
calculate its net operating loss tax attribute . . . . Finally, the corporation
must apply the excluded discharged debt to reduce its tax attributes. In
this case, the net operating loss tax attribute fully absorbs the corpora-
tion’s excluded discharge of indebtedness income. Thus, there are no
items of income to pass through to Gitlitz and Winn”).
9 Similar to this argument is the contention that, in cases such as this
one in which the shareholders’ suspended losses are fully deducted before
attribute reduction could take place, no net operating loss remains and no
attribute reduction can occur, thus rendering § 108(b) inoperative. How-
ever, there will be other cases in which § 108(b) will be inoperative. In
particular, if a taxpayer has no tax attributes at all, there will be no
reduction. Certainly the statute does not condition the exclusion under
§ 108(a) on the ability of the taxpayer to reduce attributes under § 108(b).
Likewise, in the case of shareholders similarly situated to petitioners
in this case, there is also the possibility that other attributes, see
§§ 108(b)(2)(B)–(G), could be reduced.

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220 GITLITZ v. COMMISSIONER
Breyer, J., dissenting
They would be exempted from paying taxes on the full
amount of the discharge of indebtedness, and they would be
able to increase basis and deduct their previously suspended
losses. See, e. g., 182 F. 3d, at 1147–1148. Because the
Code’s plain text permits the taxpayers here to receive these
benefits, we need not address this policy concern.10
* * *
The judgment of the Court of Appeals, accordingly, is
reversed.
It is so ordered.
Justice Breyer, dissenting.
I agree with the majority’s reasoning with the exception
of footnotes 6 and 10. The basic statutory provision before
us is 26 U. S. C. § 108—the provision that excludes from the
“gross income” of any “insolvent” taxpayer, income that can-
cellation of a debt (COD) would otherwise generate. As the
majority acknowledges, however, ante, at 214–215, n. 6, § 108
contains a subsection that sets forth a special exception.
The exception, entitled “Special rules for S corporation,”
says:
10 The benefit at issue in this case arises in part because § 108(d)(7)(A)
permits the exclusion of discharge of indebtedness income from gross in-
come for an insolvent S corporation even when the S corporation share-
holder is personally solvent. We are aware of no other instance in which
§ 108 directly benefits a solvent entity. However, the result is required
by statute. Between 1982 and 1984, § 108 provided that the exclusion
from gross income and the reduction in tax attributes occurred at the
shareholder level. See Subchapter S Revision Act of 1982, Pub. L. 97–354,
§ 3(e), 96 Stat. 1689. This provision, which paralleled the current taxation
of partnerships at the partner level, see 26 U. S. C. § 108(d)(6), prevented
solvent shareholders from benefiting as a result of their S corporation’s
insolvency. In 1984, however, Congress amended the Code to provide
that § 108 be applied “at the corporate level.” Tax Reform Act of 1984,
Pub. L. 98–369, § 721(b), 98 Stat. 966. It is as a direct result of this
amendment that the solvent petitioners in this case are able to benefit
from § 108’s exclusion.

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221 Cite as: 531 U. S. 206 (2001)
Breyer, J., dissenting
“(A) Certain provisions to be applied at corporate
level.
“In the case of an S corporation, subsections (a), (b),
(c), and (g) shall be applied at the corporate level.” 26
U. S. C. § 108(d)(7)(A).
If one reads this language literally as exclusive, both the
COD exclusion (§ 108(a)) and the tax attribute reduction
(§ 108(b)) would apply only “at the corporate level.” Hence
the COD income would not flow through to S corporation
shareholders. Consequently, the insolvent S corporation’s
COD income would not increase the shareholder’s basis and
would not help the shareholder take otherwise unavailable
deductions for suspended losses.
The Commissioner argues that we should read the lan-
guage in this way as preventing the flow-through of the
corporation’s COD income. Brief for Respondent 27. He
points to the language of a House Committee, which appar-
ently thought, when Congress passed an amendment to § 108,
that the Commissioner’s reading is correct. H. R. Rep.
No. 103–111, pp. 624–625 (1993) (“[T]he exclusion and basis
reduction are both made at the S corporation level (sec.
108(d)(7)). The shareholders’ basis in their stock is not ad-
justed by the amount of debt discharge income that is ex-
cluded at the corporate level”). At least one commentator
believes the same. See Loebl, Does the Excluded COD In-
come of an Insolvent S Corporation Increase the Basis of the
Shareholders’ Stock?, 52 U. Fla. L. Rev. 957, 981–988 (2000).
But see Lockhart & Duffy, Tax Court Rules in Nelson That
S Corporation Excluded COD Income Does Not Increase
Shareholder Stock Basis, 25 Wm. Mitchell L. Rev. 287 (1999).
The Commissioner finds support for his literal, exclusive
reading of § 108(d)(7)(A)’s language in the fact that his read-
ing would close a significant tax loophole. That loophole—
preserved by the majority—would grant a solvent share-
holder of an insolvent S corporation a tax benefit in the form
of permission to take an otherwise unavailable deduction,

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222 GITLITZ v. COMMISSIONER
Breyer, J., dissenting
thereby sheltering other, unrelated income from tax. See
Witzel v. Commissioner, 200 F. 3d 496, 497 (CA7 2000)
(Posner, C. J.) (“It is hard to understand the rationale for
using a tax exemption to avoid taxation not only on the in-
come covered by the exemption but also on unrelated income
that is not tax exempt”). Moreover, the benefit often would
increase in value as the amount of COD income increases, a
result inconsistent with congressional intent to impose a
“price” (attribute reduction), see Lipton, Different Courts
Adopt Different Approaches to the Impact of COD Income
on S Corporations, 92 J. Tax. 207 (2000), on excluded COD.
Further, this deduction-related tax benefit would have very
different tax consequences for identically situated taxpayers,
depending only upon whether a single debt can be split into
segments, each of which is canceled in a different year. For
example, under the majority’s interpretation, a $1 million
debt canceled in one year would permit Taxpayer A to de-
duct $1 million of suspended losses in that year, thereby per-
mitting A to shelter $1 million of unrelated income in that
year. But because § 108 reduces tax attributes after the
first year, five annual cancellations of $200,000 will not create
a $1 million shelter. Timing is all important.
The majority acknowledges some of these policy concerns
and confesses ignorance of any “other instance in which § 108
directly benefits a solvent entity,” but claims that its reading
is mandated by the plain text of § 108(d)(7)(A) and therefore
that the Court may disregard the policy consequences.
Ante, at 220, n. 10. It is difficult, however, to see why we
should interpret that language as treating different solvent
shareholders differently, given that the words “at the corpo-
rate level” were added “[i]n order to treat all shareholders
in the same manner.” H. R. Rep. No. 98–432, pt. 2, p. 1640
(1984). And it is more difficult to see why, given the fact
that the “plain language” admits either interpretation, we
should ignore the policy consequences. See Commissioner
v. Gillette Motor Transport, Inc., 364 U. S. 130, 134–135

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223 Cite as: 531 U. S. 206 (2001)
Breyer, J., dissenting
(1960) (abandoning literal meaning of 26 U. S. C. § 1221 (1958
ed.) for a reading more consistent with congressional intent).
Accord, Commissioner v. P. G. Lake, Inc., 356 U. S. 260, 264–
267 (1958); Corn Products Refining Co. v. Commissioner, 350
U. S. 46, 51–52 (1955); Hort v. Commissioner, 313 U. S. 28,
30–31 (1941).
The arguments from plain text on both sides here produce
ambiguity, not certainty. And other things being equal, we
should read ambiguous statutes as closing, not maintaining,
tax loopholes. Such is an appropriate understanding of Con-
gress’ likely intent. Here, other things are equal, for, as far
as I am aware, the Commissioner’s literal interpretation of
§ 108(d)(7)(A) as exclusive would neither cause any tax-
related harm nor create any statutory anomaly. Petitioners
argue that it would create a linguistic inconsistency, for they
point to a Treasury Regulation that says that the Commis-
sioner will apply hobby loss limitations under § 183 “at the
corporate level in determining” allowable deductions, while,
presumably, nonetheless permitting the deduction so limited
to flow through to the shareholder. Treas. Reg. § 1.183–1(f),
26 CFR § 1.183–1(f) (2000). But we are concerned here with
the “application” of an exclusion, not with “determining”
the amount of a deduction. Regardless, the regulation’s use
of the words “at the corporate level,” like the three other
appearances of the formulation “applied” or “determined” “at
the corporate level” in the Code, occur in contexts that are
so very different from this one that nothing we say here need
affect their interpretation. See 26 U. S. C. § 49(a)(1)(E)(ii)(I)
(determining whether financing is recourse financing); 26
U. S. C. § 264(f)(5)(B) (1994 ed., Supp. III) (determining how
to allocate interest expense to portions of insurance policies);
26 U. S. C. § 302(e)(1)(A) (determining whether a stock distri-
bution shall be treated as a partial liquidation). If there are
other arguments militating in favor of the majority’s inter-
pretation, I have not found them.

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224 GITLITZ v. COMMISSIONER
Breyer, J., dissenting
The majority, in footnote 6, says that the words “at the
corporate level” in § 108(d)(7)(A) apply to the exclusion of
COD income from corporate income and to “tax attribute
reduction,” but do not “suspen[d] the operation of . . . ordi-
nary pass-through rules” because § 108(d)(7)(A) “does not
state or imply that the debt discharge provisions shall apply
only ‘at the corporate level.’ ” It is the majority, however,
that should explain why it reads the provision as nonexclu-
sive (where, as here, its interpretation of the Code results in
the “practical equivalent of [a] double deduction,” Charles
Ilfeld Co. v. Hernandez, 292 U. S. 62, 68 (1934)). See United
States v. Skelly Oil Co., 394 U. S. 678, 684 (1969) (requiring
“clear declaration of intent by Congress” in such circum-
stances). I do not contend that § 108(d)(7)(A) must be read
as having exclusive effect, only that, given the alternative,
this interpretation provides the best reading of § 108 as a
whole. And I can find no “clear declaration of intent by
Congress” to support the majority’s contrary conclusion re-
garding § 108(d)(7)(A)’s effect. It is that conclusion from
which, for the reasons stated, I respectfully dissent.