lckent wrote:Reg Sec 1.108-7, I think you take the NOL deduction first, if not all used, the remaining balance is reduced.
Exactly.
$1,100,000 of debt discharge income (before considering section 108 exclusion).
Assumes no other current year income and no current deductions.
Excluded debt discharge income amount is $550,000
So, the REALIZED debt discharge income (after considering the exclusion) is the difference of $550,000 ($1,100,000 minus $550,000 = $550,000).
The NOL carryover from prior years to current year was given to be $950,000.
The current year realized debt discharge income of $550,000 minus the $950,000 NOL carryover from prior years = current year net loss of $400,000, which of course is equal to the tentative NOL carryover from the current year to next year.
But, this tentative $400,000 NOL carryover is reduced to zero by $400,000 of the aforementioned $550,000 exclusion, with the $150,000 excess simply disappearing. No income effect -- a taxpayer freebee!
See IRC section 108(b)(4), subparagraphs (A) and (B).