Recent Developments in Bankruptcy Tax.

Mondaq Business Briefing, December, 2003

Cancellation of Debt Income in the Consolidated Return Setting

Background. Cancellation of debt ("COD") income triggered in a title 11 case or when the taxpayer is insolvent is excluded from gross income by statute. However, COD income thus excluded from gross income nevertheless reduces the corporate taxpayer's tax attributes (principally its net operating losses ("NOLs") and basis in assets) in the rather complicated fashion outlined in the Internal Revenue Code. Until recently, it was unclear whether COD income earned by one member of an affiliated group filing consolidated returns reduced the entire group's NOLs, or only the NOLs attributable to the member incurring the COD income

Example 1. Acme and its wholly owned subsidiary file consolidated returns....