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Bankruptcy and Insolvency Taxation, 4th Edition by Robert Liquerman, Grant W. Newton

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APPENDIX E

Selected Provisions from the General Explanation of the Tax Reform Act of 1986

(H.R. 3838, 99th Congress; Public Law 99-514)

Discharge of Indebtedness Income for Certain Farmers 1

Special Limitations on Net Operating Loss and Other Carryforwards 3

Recognition of Gain or Loss on Liquidating Sales and Distributions of Property 41

Cancellation of Indebtedness for Solvent Taxpayers 67

DISCHARGE OF INDEBTEDNESS INCOME FOR CERTAIN FARMERS (SEC. 405 OF THE ACT AND SECS. 108 AND 1017 OF THE CODE)1

Prior Law

Under prior and present law, gross income is defined to include income from discharge of indebtedness (sec. 61). If a solvent taxpayer received income from discharge of trade or business indebtedness, prior law provided the taxpayer an election to exclude that income if the taxpayer’s basis in depreciable property was reduced (secs. 108 and 1017). If the amount of the discharge of indebtedness income exceeded a solvent taxpayer’s available basis, the taxpayer recognized income in an amount of the excess.

Under prior (and present) law, if an insolvent taxpayer receives income from discharge of indebtedness, the income is excluded (to the extent it does not exceed the amount of the taxpayer’s insolvency).2 The taxpayer’s tax attributes must be reduced by the amount of the excluded income. Reduction is required in the following attributes (in the following order): net operating losses and carryovers, general business credit carryovers, capital loss carryovers, basis of property, ...

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