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excess of liabilities over the fair market value of the assets,
immediately before the discharge.
There is, however, a condition for the exclusion of COD
income. Section 108(b)(1) requires the taxpayer to reduce
certain tax attributes by the amount of the debt discharged. In
particular, section 108(b)(2) enumerates the tax attributes to be
reduced and the order in which they are reduced: (1) Net
operating losses; (2) general business credits; (3) capital loss
carryovers; (4) basis reduction; and (5) foreign tax credit
carryovers. Section 108(b)(4)(A) governs the timing of those
reductions, requiring that the reductions be made "after the
determination of the tax imposed by [chapter 1 of the Code] for
the taxable year of the discharge." Thus, the tax attributes are
reduced as of the first day of the following tax year.
Section 108(d)(7) prescribes how section 108(a) and (b) are
applied to S corporations. Section 108(d)(7) provides in
pertinent part:
(A) * * *[Certain provisions] to be * * * applied at
corporate level.--In the case of an S corporation,
subsections (a) [and] (b) * * * shall be applied at the
corporate level.
(B) Reduction in carryover of disallowed losses
and deductions.--In the case of an S corporation, for
purposes of subparagraph (A) of subsection (b)(2), any
loss or deduction which is disallowed for the taxable
year of the discharge under section 1366(d)(1) shall be
treated as a net operating loss for such taxable year.
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Last modified: May 25, 2011