Debtor's use of NOLs received from bankruptcy estate.

• Author: Benton, Oren L.
• Position: Net operating losses

The Tax Court recently ruled that a former debtor in bankruptcy (P) could apply net operating losses (NOLs) acquired from his bankruptcy estate against nonbankruptcy income recognized during the bankruptcy proceeding.

Issues

The IRS contended that P is entitled to carry forward qualified NOLs only to years occurring after the bankruptcy termination; P argued that he can apply bankruptcy estate losses that he succeeded to at confirmation, to any year after bankruptcy commencement. He also contended that he can apply his own prebankruptcy NOLs to his tax years following the bankruptcy commencement, to the extent not used by the bankruptcy estate.

Law

At the commencement of a bankruptcy under Title 11, the estate becomes a taxable entity treated as an individual taxpayer as to the computation of income from the estate's assets. The debtor continues as a separate taxable entity during the bankruptcy, as to income that the bankruptcy estate is not entitled to under Title 11. Under Sec. 1398(g), the estate succeeds to certain of the debtor's income tax attributes, including his or her NOL carryovers under Sec. 172, and capital loss carryovers under Sec. 1212, from tax periods before the commencement of the bankruptcy; see Sec. 1398(g)(1) and (5). To the extent the estate has not used those same tax attributes, the debtor succeeds to them under Sec. 1398(i) when the estate terminates.

Although a debtor may succeed to an estate's NOLs when the estate terminates, Sec. 1398(j)(2)(B) expressly prohibits the debtor from carrying back the estate's or the debtor's post-commencement losses to pre-petition tax years. However, that section prohibits only carrybacks to pre-commencement years; it does not place any limit on post-commencement years. The use of the bankruptcy commencement date in Sec. 1398(j)(2)(B) to demarcate the earliest year to which a loss may be carried...