, called cancellation of debt (COD) income, to the debtor, insofar as the amount paid to the creditor in satisfaction of the debt during bankruptcy is less than the amount owed by the debtor. Indeed, the Internal Revenue Code says that income from the discharge of indebtedness is part of a taxpayer's gross income. However, the Code then says that such COD income is excluded from the taxpayer's gross income if the discharge occurs in a title 11 (Bankruptcy Code) case. This means that the discharge of a debt during bankruptcy is not a taxable event, even when the debtor is allowed to satisfy a debt by paying an amount considerably less than that which was owed by the debtor.
The cost of this benefit, however, is that the tax attributes of the debtor, such as net operating losses and general business credits, are reduced to the extent that the debtor excludes COD income under ( 108(a). This means that the debtor, or the estate under Chapters 7 and 11, cannot enjoy the benefits of attributes which were financed wi
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