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Reduction of Tax Attributes under I.R.C. § 108(b)

Steven WalkerMarch 4, 2022

A taxpayer does not always get to eat cake and keep it too. When discharge of indebtedness (other than real property business debt) is excluded from gross income, corresponding reductions must be made to the taxpayer’s tax attributes. See Checkpoint EXP ¶1084.02 Reduction of tax attributes; Code Sec. 108(b)(1).

  1. Net operating loss
  2. General business credit
  3. Minimum tax credit
  4. Capital loss carryover
  5. Basis reduction (see below)
  6. Passive activity loss and credit carryovers
  7. Foreign tax credit carryovers

 See Code Sec. 108(b)(2); Reg §1.108-7(a)(1).

There are ordering rules that come into play.  I.R.C. § 108(b)(4).

The debtor can elect to alter the sequence in which tax attributes are reduced, by first applying any portion of the excluded debt discharge income against the bases of depreciable assets. Code Sec. 108(b)(5)(A); See Checkpoint EXP ¶1084.02 Reduction of tax attributes

I.R.C. § 1017 provides additional rules regarding the reduction of basis of property held by the taxpayer.