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from gross income in the year of discharge under section 108(a).
In exchange for this exclusion, certain tax attributes that pass
to the debtor from the bankruptcy estate must be reduced by the
amount of debt discharged. Sec. 108(b)(2). One such tax
attribute is any remaining loss carryforward. Id.
Petitioner was discharged in bankruptcy in 1997. Instead of
petitioner succeeding to any loss carryforward from the Estate in
1997, respondent argues that any loss carryforward must be
reduced dollar for dollar by the amount of debt discharged. We
agree.
The net operating loss that each of Davidge and Kuma
sustained in 1990 flowed through on December 31, 1990, to the
Estate, the sole shareholder at both S corporations’ yearend.
The Estate carried forward these losses through 1997, the year in
which the bankruptcy proceedings terminated. When petitioner was
discharged in bankruptcy, any remaining losses in the Estate
would have passed to him under section 1398(i). However, the
discharged $4 million Citibank loan created COD income that was
excluded from petitioner’s gross income under section 108(a).
Thus, any loss carryforward--in this case, the loss approximating
$3,500,000--otherwise available to petitioner upon the
termination of the Estate is reduced dollar for dollar for the
excluded COD income under section 108(b)(2). Therefore, any loss
carryforward of the Estate to which petitioner succeeded was
reduced to zero under section 108(b)(2)(A). Petitioner had no
loss in 1997 to recognize in that year or to carry forward to
subsequent years.
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