Tax Attributes in Bankruptcy

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    Tax Attributes in Bankruptcy

    S-Corporation shareholder granted debt discharge in Bankruptcy Chapter 7 Liquidation.  Both corporate and personal debts discharged.  Amount of corporate cancellation of debt exceeds remaining basis in corporate tax attributes.  What happens to the excess?  Does it pass through to individual and reduce personal tax attributes?  Does it reduce shareholder basis? 

     
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    Re: Tax Attributes in Bankruptcy

    In response to rvd71's comment:

    S-Corporation shareholder granted debt discharge in Bankruptcy Chapter 7 Liquidation.  Both corporate and personal debts discharged.  Amount of corporate cancellation of debt exceeds remaining basis in corporate tax attributes.  What happens to the excess?  Does it pass through to individual and reduce personal tax attributes?  Does it reduce shareholder basis? 

    Dear rvd71:

    Upon the filing of the petition in bankruptcy, the carryover attributes of the shareholder pass over to the bankruptcy estate, as of the beginning of the tax year for that shareholder.  If the election was made to "break the tax year", the shareholder would file a short year tax return up to the date of filing of the petition and have the attributes available for that return to offset any income to that date, including the allocation of S corporation income for the part of the year the stock was held.  Any remining atributes from that year would then pass to the estate and the shareholder will file a short year return for the income following the filing of the petition.  If the elction was not made, the shareholder files one return for the year, without the loss or credit carryovers available.  The Trustee for the estate then files a return for the bamkruptcy estate and reports any discharge income from debt relief, offseting that income with available losses and credits.  If any losses or credits remain, after the estate is closed, they would then come back to the shareholder for future use.

    Hope this helps in preparing your returns!

    Mark H. Misselbeck, C.P.A., M.S.T., Tax Principal

    Katz, Nannis + Solomon, P.C.

     

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