Page 139 - Bankruptcy Volume 1

6. Passive activity loss and credit carryovers

7. Foreign tax credit carryovers fn 22

Tax attributes are generally reduced dollar-for-dollar (three-for-one for credits). fn 23 Attribute reduction
results after determining the taxable income for the year of discharge. fn 24 This allows taxpayers to uti-
lize tax attributes to offset any current year income or gain before attribute reduction occurs. If the
amount of COD income excluded exceeds the sum of the taxpayer’s applicable tax attributes, the excess
is permanently excluded. fn 25

An alternative is available to the debtor to make an election to first reduce the basis in its depreciable
property (a B5 election). fn 26 In contrast to the normal ordering rules, the liability floor does not apply if
a B5 election is made. This election may be useful if the debtor has a large amount of long-lived depre-
ciable asset basis and soon-to-expire NOLs, particularly if the liability floor is not especially beneficial.

An additional complication arises if a debtor that is a member of a consolidated group recognizes COD
income that it excludes from income under Section 108(a). The consolidated regulations provide special
rules for attribute reduction involving the entire group. fn 27 Under the regulations, the entire group’s at-
tributes may be subject to reduction for the debtor’s COD income, according to the following ordering
rules:

1. Reduction of tax attributes of the separate debtor member, including the debtor’s basis in the
stock of another member (for example, a subsidiary of the debtor), but not below zero

2. If the debtor’s basis in the stock of another member is reduced in the first step, then reduction of
the attributes of the subsidiary member to the extent of the reduction in the member’s outside
stock basis, just as if the subsidiary had incurred an equivalent amount of COD itself (deemed
COD)

3. To the extent the first step does not absorb all the COD (and after applying the second step), then
reduction of the consolidated attributes (for example, NOLs) of all members (other than the basis
of assets)

fn 21 IRC Section 108(b)(2)(D), (3)(A), 1017(b)(2); Reg. Section 1.1017-1(b)(3).

fn 22 IRC Section 108(b)(2).

fn 23 IRC Section 108(b)(3).

fn 24 IRC Section 108(b)(4)(A).

fn 25 Reg. Section 1.108-7(a)(2).

fn 26 IRC Section 108(b)(5).

fn 27 Reg. Section 1.1502-28.

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