Hidden Tax Complexities Could Surprise and Cost Taxpayers When Reducing Attributes in Lieu of Recognizing COD Income

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Most states follow and/or adopt the federal income tax treatment of cancellation of indebtedness (COD) income under I.R.C. §108(a) as it relates to corporate taxpayers that are either insolvent or in bankruptcy. However, few states provide clear guidance about whether to follow federal attribute reduction rules under I.R.C. §108(b) as well. This article addresses some of the key state income tax issues that may arise in this context and discusses how failure to consider the state tax treatment of COD income may result in an unexpected tax liability or the loss of a tax planning opportunity.

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