Need to make sure that I'm thinking this through correctly. Facts - taxpayer is a C corporation in the software development business. Has NOL carryforward from 2018 of $950,000. There was $1,100,000 of nonrecourse debt that the creditors elected to forgive (these were former preferred shareholders who converted their preferred stock to debt a couple of years ago, evidenced by notes and other documentation). All notes were forgiven on the same day. Without factoring in any exclusions (specifically the insolvency exclusion), and assuming that taxable income excluding COD income is zero for the sake of simplicity, this means that the corporation has $150,000 of taxable income.
Now let's say that it's determined that the amount of insolvency immediately before the debt is canceled is $550,000. The amount of the insolvency thus reduces taxable income before the NOL to $550,000. The insolvency amount also is used to reduce the NOL from $950,000 to $400,000. This leaves us in the same place - $150,000 of taxable income.
Am I missing something? The client obviously wants to mitigate the tax effect of the debt cancellation, but I can't think of any way to do this (the purchase price exception doesn't apply in this case).