Douglas E. Kahle and Barbara W. Kahle - Page 3

            Division.  He reported total liabilities in the amount of                                 
            $84,261,186.38, which he shared in part with various codebtors.                           
            On March 18, 1992, he received a discharge from the Bankruptcy                            
            Court of the total amount of the $84,261,186.38 debt.                                     
                  Mr. Kahle had an NOL for the taxable year 1990.  He did not                         
            make a election pursuant to section 1398(d)(2) to adopt a short                           
            taxable year ending on the date before the commencement date of                           
            the bankruptcy.  On their 1991 return, petitioners claimed they                           
            should be allowed to utilize Mr. Kahle's 1990 NOL, a claim which                          
            respondent has disallowed.                                                                
            Statutory Framework                                                                       
                  A bankruptcy estate is created in a voluntary case upon the                         
            filing of the petition of bankruptcy.  Bankruptcy Code, 11 U.S.C.                         
            secs. 301, 542 (1978).   At that time, certain tax attributes,                            
            including any NOL's, determined as of the first day of the                                
            debtor-taxpayer's taxable year in which the bankruptcy case                               
            commences, become part of the estate, and no longer belong to the                         
            debtor-taxpayer.  Sec. 1398(g).                                                           
                  If the debtor-taxpayer makes an election under section                              
            1398(d) to adopt a short taxable year ending on the date before                           
            the commencement of the bankruptcy case, he or she may use an NOL                         
            to reduce his or her income earned during that short taxable                              
            year, and only any unused portion of the NOL becomes part of the                          
            bankruptcy estate.  Sec. 1398(d)(2).                                                      








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