c) Adjustment in the Case of Discharge of
Indebtedness Income. Under IRC section 108(a), income from discharge of
indebtedness may be excluded from gross income in certain circumstances. When
discharge of indebtedness income is excluded under this provision, IRC section
108(b) requires the taxpayer to reduce certain "tax attributes", including net
operating losses incurred in the year of the discharge or carried over to that
year, basis in assets, and net capital losses incurred in the year of discharge
or carried over to that year. These reductions generally have the effect of
including the discharge of indebtedness income in gross income at some later
time. This effective inclusion of the discharge of indebtedness income in gross
income automatically causes the discharge of indebtedness income to be included
in base income, except in the case of reductions in net operating losses
incurred in taxable years ending on or after December 31, 1986, by taxpayers
other than individuals. In those cases, the taxpayer would never include the
discharge of indebtedness income in its base income because the IITA did not
allow deduction of federal net operating losses, but instead provided for
computation and carryover of Illinois net losses under IITA Section 207 and,
prior to the enactment of Public Act 95-0233, that Section had no provision for
reduction of net losses when a taxpayer had discharge of indebtedness income.
IITA Section 207(c) provides that a taxpayer required to reduce a federal net
operating loss or federal net operating loss carryover under IRC section
108(b)(2)(A), on account of discharge of indebtedness income excluded from
gross income under IRC section 108(a) with respect to a taxable year ending on
or after December 31, 2008, must reduce its Illinois net loss incurred in the
year of the discharge or any Illinois net losses carried over to that year, to
the extent provided in this subsection.
1)
Amount of Reduction
A) Illinois Net Loss. A
taxpayer must reduce any Illinois net loss incurred in a taxable year under
Section
100.2320
by an amount equal to the amount of the reduction to the taxpayer's federal net
operating loss under IRC section 108(b)(2)(A) for the same taxable year that is
allocable to Illinois.
B) Illinois
Net Loss Carryover. A taxpayer must reduce any Illinois net loss carryover to a
taxable year under Section
100.2330
by an amount equal to the amount of the reduction to the taxpayer's federal net
operating loss carryover under IRC section 108(b)(2)(A) for the same taxable
year that is allocable to Illinois.
C) The Illinois net losses or net loss
carryovers may not be reduced below zero.
2) Attribute Reduction Allocable to Illinois.
For purposes of subsection (c)(1), the portion of the reduction to a federal
net operating loss or federal net operating loss carryover allocable to
Illinois shall be determined by multiplying the reduction required to that loss
or loss carryover under IRC section 108(b)(2)(A) by a fraction, the numerator
of which is the amount of income excluded from gross income for the taxable
year under IRC section 108(a) that would have been allocated to Illinois and
the denominator of which is the total income excluded from gross income under
IRC section 108(a) for the taxable year. The amount of income excluded from
gross income under IRC section 108(a) that would have been allocated to
Illinois shall be determined by applying the provisions of Article 3 of the
IITA as if that income had not been excluded from gross income.
3) Ordering Rules
A) Reduction Required after Determination of
Tax. The reduction required under this subsection (c) shall be made after the
determination of the tax imposed under the IITA for the taxable year of the
discharge. Accordingly, any Illinois net loss carryover available for the
taxable year in which income is excluded under IRC section 108(a) is taken into
account in computing the Illinois net loss deduction for that taxable year
under subsection (a), and only the amount of the loss remaining to carry
forward to the next taxable year, if any, is reduced under this subsection
(c).
B) Any reduction required
under this subsection (c) to Illinois net loss carryovers shall be made first
to the net loss carryover whose carryforward period will expire first, then to
the carryover that will expire next, and so forth, until the entire reduction
is made or until all carryforwards are reduced to zero.
4) Partnerships and Subchapter S
Corporations. Under IRC section 108(d)(6), the provisions of IRC section
108(a), (b), (c) and (g) are applied at the partner level. Accordingly, a
partnership does not exclude discharge of indebtedness income and is not
required to make any reduction under this subsection (c). Under IRC section
108(d)(7), the provisions of IRC section 108(a), (b), (c) and (g) are applied
at the corporate level in the case of a Subchapter S corporation, including by
treating any loss or deduction that is disallowed for the taxable year of the
discharge under IRC section 1366(d)(1) as a net operating loss for that taxable
year. Accordingly, a Subchapter S corporation may be required to make a
reduction under this subsection (c).
5) Examples. The provisions of this
subsection may be illustrated by the following examples.
A) EXAMPLE 1. For its taxable year ending
December 31, 2008, Taxpayer has $50,000 of discharge of indebtedness income
excluded from gross income under IRC section 108(a). Under Article 3 of the
IITA, but for the exclusion the entire $50,000 would have been included in the
Taxpayer's business income and a total of $10,000 of the income would have been
apportioned to Illinois. The Taxpayer has a federal net operating loss of
$40,000 for its December 31, 2008 taxable year, and an Illinois net loss of
$8,000. Under IRC section 108(b)(2)(A), Taxpayer is required to reduce its
federal net operating loss from $40,000 to $0. Under this subsection, Taxpayer
is required to reduce its Illinois net loss from $8,000 to $0 ($8,000 -
[$40,000 x ($10,000/$50,000)]).
B)
EXAMPLE 2. Assume the same facts as Example 1, except that the Taxpayer makes
an election under IRC section 108(b)(5) to reduce its basis in depreciable
property, with the result that no reduction is made to the taxpayer's federal
net operating loss. No reduction is required under this subsection (c) to the
Taxpayer's Illinois net loss.
C)
EXAMPLE 3. For its taxable year ending December 31, 2009, Taxpayer has $200,000
of discharge of indebtedness income excluded from gross income under IRC
section 108(a). Under Article 3 of the IITA, but for the exclusion the entire
$200,000 would have been included in the Taxpayer's business income and a total
of $100,000 of that income would have been apportioned to Illinois. The
Taxpayer has $50,000 of federal taxable income for its December 31, 2009
taxable year before application of a federal net operating loss carryover in
the amount of $75,000 from its December 31, 2006 taxable year, leaving $25,000
of that loss to carry forward to 2010. In addition, the Taxpayer has an
Illinois net loss for its December 31, 2009 taxable year of $10,000, but no
Illinois net loss carryovers to that year. Under IRC section 108(b)(4)(A) and
(b)(2)(A), the Taxpayer is required to reduce its 2006 federal net operating
loss remaining to carry forward to 2010 from $25,000 to $0. Since no reduction
is made to a federal net operating loss incurred in 2009 under IRC section
108(b)(2)(A), no reduction is required to be made to the Taxpayer's 2009
Illinois net loss under this subsection (c).
D) EXAMPLE 4. Assume the same facts as in
Example 3, except that the Taxpayer has $25,000 of Illinois net income for its
December 31, 2009 taxable year and has Illinois net loss carryovers of $20,000
from its December 31, 2007 taxable year and $20,000 from its December 31, 2008
taxable year. Under subsection (c)(3)(B), the $20,000 Illinois net loss
carryover from 2007 and $5,000 of the 2008 Illinois net loss carryover are
first applied to reduce Taxpayer's Illinois net income to $0 for its December
31, 2009 taxable year. The remaining $15,000 Illinois net loss carryover from
2008 is reduced under this subsection to $2,500 ($15,000 - [$25,000 x
($100,000/$200,000)]). Reduction is required even though the Taxpayer's federal
net operating loss carryover relates to its December 31, 2006 taxable year
while the Illinois net loss carryover is from Taxpayer's December 31, 2008
taxable year.
E) EXAMPLE 5. For its
taxable year ending December 31, 2009, Taxpayer has $200,000 of discharge of
indebtedness income excluded from gross income under IRC section 108(a). Under
Article 3 of the IITA, but for the exclusion the entire $200,000 would have
been included in the Taxpayer's business income and a total of $100,000 of that
income would have been apportioned to Illinois. The Taxpayer has a $50,000
federal net operating loss for the 2009 taxable year and federal net operating
loss carryovers of $25,000 from its December 31, 2006 taxable year and $75,000
from its December 31, 2007 taxable year. Taxpayer has an Illinois net loss of
$25,000 for its December 31, 2009 taxable year, and Illinois net loss
carryovers of $6,000 from its December 31, 2006 taxable year and $30,000 from
its December 31, 2007 taxable year. Under IRC section 108(b)(2)(A), Taxpayer's
$50,000 federal net operating loss for 2009 and $25,000 net operating loss
carryover from 2006 are each reduced to $0. In addition, the $75,000 net
operating loss carryover from 2007 is reduced to $50,000. Under this
subsection, the Taxpayer's Illinois net loss is reduced to $0 ($25,000 -
[$50,000 x ($100,000/$200,000)]). In addition, the Taxpayer's Illinois net loss
carryover from 2006 is reduced to $0, and its Illinois net loss carryover from
2007 is reduced to $11,000 Under subsection (c)(3)(B), the $25,000 reduction to
the Taxpayer's Illinois net loss carryover is first applied to reduce the
carryover from 2006 from $6,000 to $0, and the remaining reduction is applied
to reduce the carryover from 2007 from $30,000 to $11,000.
