Question

During​ bankruptcy, USAUSA Corporation debt was reduced from $ 780 comma 000$780,000 to $ 400 comma 000$400,000. USAUSA ​Corporation's assets are valued at $ 500 comma 000$500,000. USA'sUSA's NOL carryover was $ 400 comma 000$400,000. Requirements a. Is USAUSA Corporation required to report any income from the discharge of its​ debts? b. Which tax attributes are reduced and by how​ much? Assume USAUSA does not make any special elections when reducing its attributes.

Answer 1

Answers:

a.)

If a Section108 discharge occurs in bankruptcy then a taxpaying entity is not required to include the discharge in gross income. This section exempts gains from forgiven debt from being factored into taxable income, providing a measure of relief for certain taxpayers who find themselves facing serious financial difficulties.

.

b.)

Here the USA corporation could elect to reduce the attribute "the cost basis of property" and have the basis (cost price) of the assets reduced by $380,000* and defer the tax until the property is sold. Reducing the cost basis of an asset means that a taxpayer will recognize a higher taxable gain (or smaller loss) from the sale of the asset. If the property is sold for a gain, then $380,000 of that gain will be taxed as ordinary income.

Notes:

* 380,000 = Reduction in Debt

= $780,000 - $400,000

= $380,000