Discharge of Indebtedness Income

Discharge of Indebtedness Income means:
income from the discharge of indebtedness; includable in gross income for tax purposes unless it meets one of the following exclusions:

1. debt discharged under a Chapter 11 bankruptcy action in which the discharge either is granted by the court or is under a plan approved by the court, 2. debt discharged while a taxpayer is insolvent outside of bankruptcy, but only to the extent of insolvency, or.

3. discharge of qualified farm indebtedness.

When a taxpayer excludes income from the discharge of indebtedness under a Chapter 11 bankruptcy or the insolvency exclusion, he or she must reduce tax attributes, such as carryovers for net operating loss and capital loss, and the property basis by the amount excluded from income. General business credits and foreign tax credits must be reduced at the rate of 33 1/3 cents for every dollar of income excluded. Section 108 of the Internal Revenue Code states the order in which attributes and credits must be reduced. Farmers can exclude income from the discharge of qualified farm indebtedness and are also required to reduce tax attributes. Former IRC (check if this IRC provision is current here) §§6l(a)(12) and 108.