- 17 -
petitioners’ financial hardships, and assuming arguendo that
petitioners did establish basis using the public property
records, and did establish that they were insolvent,4 petitioners
are incorrect as a matter of law in stating that they had net
operating losses. Federal law provides that, generally, a
taxpayer must recognize income from the discharge of
indebtedness. Sec. 61(a)(12); United States v. Kirby Lumber Co.,
284 U.S. 1 (1931). The Code provides an exception to the
recognition of cancellation of indebtedness income in cases where
the discharge occurs when the taxpayer is insolvent. See sec.
108(a)(1)(B); see also Babin v. Commissioner, 23 F.3d 1032, 1035
(6th Cir. 1994), affg. T.C. Memo. 1992-673. Section 108(b)(1)
provides in turn that, upon discharge, the taxpayer must reduce
certain tax attributes by the amount of the cancellation of
indebtedness income excluded from gross income. Section
108(b)(2) provides that NOLs are the first tax attribute to be
reduced,5 and section 108(b)(3) provides that they be reduced
dollar-for-dollar by the amount of the cancellation of
indebtedness income excluded under section 108(a). Petitioners
have not proven that they did not have cancellation of
4 The Court makes no such findings.
5 A taxpayer can elect to reduce the basis of any
depreciable property by the amount of debt discharged before
reducing the amount of any other tax attributes. Sec. 108(b)(5).
Petitioners did not make such an election.
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011