150-314-0120 - Reduction of Tax Attributes after Discharge of Debt

150-314-0120. Reduction of Tax Attributes after Discharge of Debt

(1) A taxpayer who has excluded income from the discharge of indebtedness for federal tax purposes under IRC 108 must also exclude the income for Oregon purposes. Separate rules apply depending on whether the discharge is related to insolvency or qualified farm indebtedness, or to bankruptcy. The taxpayer must reduce Oregon tax attributes independently of the reduction made at the federal level.

Example 1: Henry realized income from the discharge of debt in the amount of $100,000. Henry may elect to exclude the income to the extent he is insolvent as defined under IRC 108. Henry determines that of the $100,000 of income, he may exclude $90,000 due to insolvency. The remaining $10,000 is included in Henry's federal adjusted gross income. Henry is required to reduce certain tax attributes to the extent he has excluded the debt discharge from income. The election to exclude the income under IRC 108 is also effective for Oregon tax purposes. Assume Henry has the following tax attributes: [See PDF link below.]

(2) If an insolvent taxpayer or a taxpayer with discharged qualified farm indebtedness elects under IRC 108(b)(5) to reduce the basis of depreciable property first, the election is also effective for Oregon tax purposes.

(3) Oregon tax attributes resulting from a bankruptcy petition filed on or after October 17, 2005 are to be reduced according to the version of 11 USC 346(j), as in effect on December 31, 2016. A different version of 11 USC 346(j) applies to tax attributes that are reduced as a result of a bankruptcy petition filed before October 17, 2005. The amount of income from discharge of indebtedness that is excluded from federal taxable income as a result of a bankruptcy petition is subject to the apportionment provisions of ORS chapter 314. Oregon tax attributes are to be reduced in an amount equal to the amount of income from discharge of indebtedness that is apportioned to Oregon.

Example 2: Tom realized income from the discharge of debt equal to $40,000. The entire amount may be excluded from his income due to insolvency. For federal purposes, Tom has a net operating loss of $5,000 and rental property with a basis in the land of $50,000 and a basis in the building of $30,000. Tom elects to reduce the basis of his depreciable assets first under IRC 108(b)(5). For federal purposes, Tom absorbs the excluded income by reducing federal tax attributes as follows: [See PDF link below.]

Example 3: XYZ Corporation is bankrupt and under the supervision of the bankruptcy court. The corporation realized income from discharge of debt in the amount of $10,000,000. XYZ elects to exclude the income for federal purposes under the provisions of IRC 108. XYZ's Oregon apportionment percentage is 10% in the year of debt discharge. Assume XYZ has the following tax attributes: [See PDF link below.]

(RD 3-1995, f. 12-29-95, cert. ef. 12-31-95; Renumbered from 150-314.306, REV 32-2016, f. 8-12-16, cert. ef. 9-1-16; REV 40-2017, f. & cert. ef. 8-2-17; REV 71-2017, amend filed 12/22/2017, effective 1/1/2018)

Publications: Contact the Oregon Department of Revenue to learn how to obtain a copy of the publication referred to or incorporated by reference in this rule pursuant to ORS 183.360(2) and 183.355(1)(b).

To view tables referenced in rule text, click here to view rule.

Statutory/Other Authority: ORS 305.100

Statutes/Other Implemented: ORS 314.306

The following state regulations pages link to this page.