Section 108, CODI, final year corporate tax return

Technical topics regarding tax preparation.
#1
Taxctfl  
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Corporate taxpayer has CODI in excess of NOL carryover. Keep in mind this is a final year tax return for a company out of business / liquidated / dissolved, etc.

Taxpayer is insolvent for the full $120k debt. Is the CODI reported on the final year tax return to the extent it exhausts the NOL? Let's say $120k total CODI, $110k NOL available to current year of which only $100k can be used due to TCJA 80% NOL limit. Taxpayer reports $100k income and $100k NOL. The remaining $20k is reported on form 982 as excluded from gross income. Is this correct?

Is the $100k NOL used in the current year also reflected on the form 982 reduction of tax attributes or NO since it was simply used in the current year?

Also, to complicate this, there is NOL CF that will never be used because of the 80% limit of $10k. Is that the true tax attribute that needs to be shown as a reduction on part II? Not sure it matters in the grand scheme of things since this is a final tax return and they will never use that portion of the NOL.

Thanks in advance.
PS- figures may not make sense, I am using examples to simplify.
 

#2
zl28  
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i think you are supposed to attach a schedule showing the reduction in attributes.

also, you can opt to reduce the basis in your assets first if that may somehow help; not sure if it does

Check out Section 108
 

#3
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I assume you are getting paid. So I have to ask: Why is someone paying you to prepare this return?
Steve
 

#4
Taxctfl  
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gatortaxguy wrote:I assume you are getting paid. So I have to ask: Why is someone paying you to prepare this return?


Not sure exactly what you're implying? There's more to the final tax return that is irrelevant to the specific questions asked in the post.
 

#5
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I don't see a benefit to filing the return. It seems there is an unstated assumption that filing is somehow necessary. If the corporation is defunct, why bother? No one benefits from the expense and no one has a duty to file it on behalf of the corporation. So it seems to me that it's a waste of resources. All it does is make the corporation even more worthless -- as if that's possible.
Steve
 

#6
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Taxctfl wrote:Taxpayer is insolvent for the full $120k debt. Is the CODI reported on the final year tax return to the extent it exhausts the NOL? Let's say $120k total CODI, $110k NOL available to current year of which only $100k can be used due to TCJA 80% NOL limit. Taxpayer reports $100k income and $100k NOL. The remaining $20k is reported on form 982 as excluded from gross income. Is this correct?

I don’t believe that this is how the law works.

If the corporation is insolvent for the full $120k debt (e.g., no assets, $120k debt, insolvency is $120k), then the entire CODI is excluded from income per 108(a)(1)(B). Under 108(b)(2)(A), the NOL for the year of the discharge and any NOL carryover to this year is reduced. That means that the $110k NOL is reduced by the $120k excluded CODI, reducing the NOL to zero.

The 80% limitation that you refer to (Sec. 172(a)(2)(B)(ii)) is applied in determining how much of an NOL is deductible. I don't think it has any effect on the reduction of tax attributes.

I disagree with gatortaxguy’s opinion that filing a return is unnecessary. If this is the corporation’s final return, then the corporation was in existence during part of the year, and therefore, it is required to file a return. Sec. 6012(a)(2), Reg. 1.6012-2(a)(2). There might not be any tax liability, but that’s not the test.
 

#7
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Obviously, someone other than the corporation has to fund preparation and filing of the return at issue. I'm saying that for all practical purposes the requirement to file is immaterial in this situation and that whoever is paying for preparation and filing of the corporate return (with after-tax dollars) should conduct a cost-benefit analysis for himself or herself before expending the money.
Steve
 

#8
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You said:
there is an unstated assumption that filing is somehow necessary.

It's not unstated. The requirement for the corporation to file the return is right in the statute and regulations I cited. As a result, we are not allowed to advise the client to "conduct a cost-benefit analysis" as to whether to file the return.
 

#9
Taxctfl  
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NoCalCPA85 wrote:
Taxctfl wrote:Taxpayer is insolvent for the full $120k debt. Is the CODI reported on the final year tax return to the extent it exhausts the NOL? Let's say $120k total CODI, $110k NOL available to current year of which only $100k can be used due to TCJA 80% NOL limit. Taxpayer reports $100k income and $100k NOL. The remaining $20k is reported on form 982 as excluded from gross income. Is this correct?

I don’t believe that this is how the law works.

If the corporation is insolvent for the full $120k debt (e.g., no assets, $120k debt, insolvency is $120k), then the entire CODI is excluded from income per 108(a)(1)(B). Under 108(b)(2)(A), the NOL for the year of the discharge and any NOL carryover to this year is reduced. That means that the $110k NOL is reduced by the $120k excluded CODI, reducing the NOL to zero.

The 80% limitation that you refer to (Sec. 172(a)(2)(B)(ii)) is applied in determining how much of an NOL is deductible. I don't think it has any effect on the reduction of tax attributes.

I disagree with gatortaxguy’s opinion that filing a return is unnecessary. If this is the corporation’s final return, then the corporation was in existence during part of the year, and therefore, it is required to file a return. Sec. 6012(a)(2), Reg. 1.6012-2(a)(2). There might not be any tax liability, but that’s not the test.



Thanks gatortaxguy. Noted and have considered your point.

NoCalCPA85-
I thought about that approach but read the below excerpt in BNA. Getting confused about whether the NOL is an asset in the insolvency test. It seems to be a matter of presentation in getting to the same bottom line. This isn't a perfect example but the wording makes it sound like the CF is exhausted first on page 1. But either way, the CF is exhausted OR reduced in full:

"b. Net Operating Losses and Net Capital Losses —
Net operating losses (NOL) and net capital losses are reduced before carryovers of such items, and carryovers are reduced in the order of the taxable years in which the carryovers arose.307
307 §108(b)(4)(B).

Example— Reduction of NOLs and Net Capital Losses

In a bankruptcy proceeding under title 11, a discharge in the amount of $100,000 is received for the estate's tax year 2006. The estate has an NOL of $50,000 from tax year 2006, and NOL carryovers of $25,000 and $50,000 from tax years 2001 and 2002, respectively. The $100,000 of discharged indebtedness first is applied against the $50,000 NOL for 2006. The remaining $50,000 of discharged indebtedness next is applied to eliminate the $25,000 carryover from 2001, and the remaining $25,000 is applied to reduce the $50,000 carryover from tax year 2002.

Note : The underlying theory of the ordering rules is that NOLs and NOL carryovers should be reduced in the same manner as they would have been reduced had the discharged indebtedness income been realized."
 

#10
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The Deferred Tax Asset related to the NOL is probably considered in the insolvency calculation. I don't know.
Insolvency = the excess of liabilities over assets, immediately before the discharge of debt.
 

#11
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An NOL carryover isn’t an asset for purposes of determining insolvency. If you think it is, then please point me to where it's reported on a balance sheet.

The except you quoted from BNA discusses the order in which the NOL carryovers are reduced (oldest first). I don’t see how that relates to the facts you provided. My point is that the NOL doesn’t exceed the extent of insolvency, and therefore, it must be reduced to zero.
 

#12
sjrcpa  
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Also, the tax attributes are reduced as of the first day of the next year. Here, there is no next year.
 

#13
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Taxctfl wrote:Corporate taxpayer has CODI in excess of NOL carryover. Keep in mind this is a final year tax return for a company out of business / liquidated / dissolved, etc.

Taxpayer is insolvent for the full $120k debt. Is the CODI reported on the final year tax return to the extent it exhausts the NOL? Let's say $120k total CODI, $110k NOL available to current year of which only $100k can be used due to TCJA 80% NOL limit. Taxpayer reports $100k income and $100k NOL. The remaining $20k is reported on form 982 as excluded from gross income. Is this correct?

Is the $100k NOL used in the current year also reflected on the form 982 reduction of tax attributes or NO since it was simply used in the current year?

Also, to complicate this, there is NOL CF that will never be used because of the 80% limit of $10k. Is that the true tax attribute that needs to be shown as a reduction on part II? Not sure it matters in the grand scheme of things since this is a final tax return and they will never use that portion of the NOL.



Thanks in advance.
PS- figures may not make sense, I am using examples to simplify.


I sent you a PM
 

#14
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"It's not unstated. The requirement for the corporation to file the return is right in the statute and regulations I cited. As a result, we are not allowed to advise the client to "conduct a cost-benefit analysis" as to whether to file the return."

You're missing my point. When a corporation folds everyone quits and there is no one left to represent the corporation.

So the first thing a preparer must do in this situation -- actually every situation -- is identify the client. The corporation has a duty to file, but cannot do so without a third party doing it for the corporation. If that person wants to take on that responsibility, then so be it. But advising the third-party client to do so cannot be justified in the absence of some benefit to the third party.

My sense is that the only person benefitting is the preparer.
Steve
 

#15
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sjrcpa wrote:Also, the tax attributes are reduced as of the first day of the next year. Here, there is no next year.

Only true for reducing the basis of property. Sec. 1017(a). Not true for NOLs. Sec. 108(b)(4)(A).
 

#16
sjrcpa  
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Thanks. I don't deal with this very often.
 

#17
Taxctfl  
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gatortaxguy wrote:"It's not unstated. The requirement for the corporation to file the return is right in the statute and regulations I cited. As a result, we are not allowed to advise the client to "conduct a cost-benefit analysis" as to whether to file the return."

You're missing my point. When a corporation folds everyone quits and there is no one left to represent the corporation.

So the first thing a preparer must do in this situation -- actually every situation -- is identify the client. The corporation has a duty to file, but cannot do so without a third party doing it for the corporation. If that person wants to take on that responsibility, then so be it. But advising the third-party client to do so cannot be justified in the absence of some benefit to the third party.

My sense is that the only person benefitting is the preparer.


You're making assumptions without knowing all the facts. It's been stated that the full scope of the situation hasn't been discussed here as it isn't relevant to this one question up for discussion. And you keep distracting from the original question to prove your point. You didn't ask additional questions in order to fully understand before suggesting that a return shouldn't be prepared. What if there are state issues? How could you possibly know if there is a benefit or not based on this thread? Thanks again for your input.
 

#18
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“ When a corporation folds everyone quits and there is no one left to represent the corporation. ”

Is that true? Are officers permitted to do that under applicable corporate law?
 

#19
sjrcpa  
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#20
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Of course they can resign. The 13th Amendment bans involuntary servitude.

The cite involves a corporation distributing assets leaving creditors unpaid. My addition to the thread is that the creditors can get relief before getting judgments via the fraudulent transfer statutes. It is noteworthy that the statutes allow an award of attorneys fees. (The IRS would rely on transferee liability (6901(h)).
Steve
 


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