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Bankruptcy estate can't use bankrupt's passive losses.

The unsecured creditors of Dominic and Judith Antonelli sought to have a district court declare the Antonellis' unused pre-petition passive activity losses (PALs) as tax attributes of the bankruptcy estate. A bankruptcy estate - a separate taxpayer - generally is created when the individual debtor files a bankruptcy petition. The estate becomes the owner of the debtor's property and of certain of the debtor's tax attributes. The creditors wanted the PALs to offset the Antonellis' tax liabilities, thereby increasing what was available to the creditors.

IRC section 1398 lists the debtor's tax attributes to which the bankruptcy estate succeeds, including net operating losses, capital loss carryovers and others, but not unused PALs. The statute says other attributes also are included "to the extent provided in regulations." The Treasury at that time had not issued regulations including PALs in the list of tax attributes.

Result: Against the creditors. The District Court said that since passive losses are not on the list, the court has no authority under the plain language of the statute to include them among the tax attributes. Therefore, the unused PALs cannot be used to reduce tax.

Note: The IRS has issued a proposed regulation (section 1.1398-1) allowing a bankruptcy estate to succeed to the debtor's unused PALs. However, that regulation generally would be effective for petitions filed after November 8, 1992; for petitions filed earlier, the regulation would apply only on the joint election of the debtor and the estate.
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Article Details
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Publication:Journal of Accountancy
Article Type:Brief Article
Date:Mar 1, 1993
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