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."