Any remaining NOL belonging to the estate will be returned
to the debtor-taxpayer after the discharge in bankruptcy and
termination of the estate. Sec. 1398(i). The debtor is then
free to use the NOL as a carryforward, section 1398(i), or
carryback, as long as the NOL arose before the commencement of
the bankruptcy case, section 1398(j)(2)(B).
Section 108(a) provides that debt discharged in bankruptcy
is not includable in gross income. Section 108(b)(1) provides in
turn that, upon discharge, the taxpayer must reduce any tax
attributes by the amount of the debt discharged. Section
108(b)(2) provides that NOL's are the first attribute to be
reduced, and section 108(b)(3) provides that they be reduced
dollar-for-dollar by the amount of the debt discharged in the
bankruptcy. Section 108(b)(4)(A) provides that the reduction is
made "after the determination of the tax imposed by this chapter
for the taxable year of the discharge." In the alternative, the
taxpayer can elect under section 108(b)(5) to first reduce the
basis of any depreciable property by the amount of debt
discharged, before reducing the amount of any tax attributes.
Importantly, section 108(d)(8) clarifies that the "taxpayer" for
purposes of section 108(b)(1) and (5) is the bankruptcy estate,
and not the individual debtor.
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Last modified: May 25, 2011