Jeff has incurred substantial losses in his sole proprietorship as a travel agent. He recently filed for bankruptcy. As part of the bankruptcy process, $100,000 of Jeff’s debt is forgiven. Jeff has the following tax attributes:

a. What are the tax consequences of the forgiven debt?

b. Assume the same facts as in part a except that Jeff makes an election to reduce the basis of depreciable property before the reduction of the other tax attributes. How does this change the result?

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NOL for the current year NOL from last year Capital loss carryforward Adjusted basis of his business property $45,000 $22,000 $ 4,500 $68,000