Section 16.4 Rules Requiring Reduction of Debtors’ Tax Attributes

• Library: Bankruptcy Practice (2007 Ed. + 2015 Cum Supp)

C. (§16.4) Rules Requiring Reduction of Debtors’ Tax Attributes

While Congress long ago recognized that debtors in bankruptcy simply did not have the financial resources available to pay the tax resulting from discharging their indebtedness in bankruptcy, Congress did not believe that these debtors should escape taxation on discharge-of-indebtedness income forever. See S. Rep. No. 96-1035, at 10 (1980), reprinted in 1980 U.S.C.C.A.N. 7017, 7024. Thus, the Tax Code requires that debtors in bankruptcy reduce their tax attributes in an amount equal to their discharge-of-indebtedness income that was excluded from gross income. I.R.C. § 108(b).

The Tax Code requires that debtors’ tax attributes be reduced in the following specified order:

(A) NOL—Any net operating loss for the taxable year of the discharge, and any net operating loss carryover to such taxable year. (B) General Business Credit—Any carryover to or from the taxable year of a discharge of an amount for purposes for determining the amount allowable as a credit under section 38 (relating to general business...