(plaintiff family formed trusts that came to own stock in S corporation that owned C corporation stock; trust made QSub election so as to be able to disregard existence of C corporation (Treasury Regulations treat a QSub election as a deemed liquidation of the subsidiary, and under I.R.C. Secs. 332 and 337, the liquidation of a 100 percent subsidiary is not taxable - neither subsidiary nor parent has gain) and treat as division; appreciation in S corporation assets was $226 million and shareholders increased income tax basis in S corporation stock by like amount; taxpayer's argued that unrecognized gain be treated as tax-exempt income that subsidiary earned that passed through to shareholders resulting in basis increase; S corporate stock then sold for $230 million and shareholder reported loss on returns for year in issue; IRS determined that no basis increase should have occurred on QSub election - I.R.C. Sec. 337 does not result in exemption from income, but simply non-recognition because S corporation continued investment in subsidiary by holding assets directly rather than via stock ownership; court agreed with IRS and noted that situation not analogous to discharge of indebtedness recognized by S corporation which results in basis increase; no accession to wealth when subsidiary liquidated; no basis increase in shareholders from $15 million to $241 million upon QSub election - non-recognition of $226 million gain under I.R.C. Sec. 337 did not involve tax-exempt income so no related basis increase under I.R.C. Sec. 1367(a)(1) result was cumulative gain of $215 million on stock sale and not $11 million loss).