IRS Finalizes Regulations on Section 108 Reduction of Tax Attributes for S Corps
IRC Section 108 provides mandatory relief provisions requiring bankrupt or insolvent taxpayers to exclude debt discharge income (COD income) from gross income. It also provides that certain tax attributes must be reduced by the amount of excluded COD income. If the excluded COD income exceeds the amount of tax attributes available for reduction, then the “excess” COD income disappears with no further tax consequences to the debtor.
Special rules apply to S Corps. These rules provide that the mandatory relief provisions apply at the corporate level, including the determination of insolvency. COD income that is excluded from an S Corp’s income under these provisions for bankrupt or insolvent taxpayers is not a pass-through item and does not increase the basis of any shareholder’s stock.
