Lehman Brothers Financial SA (LEHNQ)

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The text bellow is copied from the Web site of the American Bar Association.

The Tax Effects of Debt Cancellation—A Primer for Non-Tax Lawyers

Exclusions and Deferrals of COD Income

If a COD event occurs and the amount of the discharged debt is known, then the next step is to turn to the various exclusions or deferrals that are available. These appear generally in IRC § 108.

Bankruptcy and Insolvency Exclusions

Bankruptcy. The bankruptcy exclusion is probably the broadest exclusion for COD income. In short, IRC § 108(a)(1)(A) provides that if a taxpayer's debts are discharged in bankruptcy, then the resulting COD income is fully excluded. This rule applies whether the discharge occurs under Chapter 7, 11, 12, or 13 of the Bankruptcy Code. Such bankruptcy debtor, however, will be required to undergo "attribute reduction," as discussed below.

Attribute Reduction. If a debtor excludes COD income under either the bankruptcy or insolvency exception, then the attribute reduction rules are triggered. Id. § 108(b). Attribute reduction forces the debtor to trade the current exclusion of income for future tax deductions. The debtor will be required to reduce tax attributes, in the following order:

net operating loss carryovers,
tax credit carryovers,
capital loss carryovers,
tax basis in assets,
passive loss carryovers, and
foreign tax credit carryovers.