Tax Issues: 1398 Short Year Abandonment of Property Cancellation of Indebtedness
Published: 2003 | Author: William J. Tucker

This paper discusses tax issues arising under Internal Revenue Code section 1398 short year abandonment of property, and the cancellation of indebtedness. 


Section 1398 of the Internal Revenue Code (“IRC”) lays out the rules relating to an individual’s title 11 case, and only applies to bankruptcies filed under Chapter 7 or 11.  At the filing of bankruptcy, a separate entity is created, and generally the tax attributes into the bankruptcy estate are measured on January 1 in the year of bankruptcy unless an election is made by the individual debtor.  There are two instances where the section 1398 election does not apply.  The first is when the bankruptcy case is dismissed, and the second is at the partnership level.  The paper further discusses issues including estate succeeds to tax attributes of the debtor, and the abandonment of property under section 554 of the Bankruptcy Code. 


Cancellation of indebtedness under IRC section 108 is also discussed.  In general, when a debt is cancelled or discharged, IRC section 61(a)(12) applies and states that “income from discharge of indebtedness” is included in gross income.  This section goes on to discuss taxation of debts forgiven, the contested liability/disputed debt exception, the purchase price adjustment exception, and IRC 108(a)(1) exceptions.

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