                          T.C. Memo. 1997-91



                        UNITED STATES TAX COURT



         DOUGLAS E. KAHLE AND BARBARA W. KAHLE, Petitioners v.
              COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 19713-94.                  Filed February 20, 1997.



     Douglas E. Kahle, for petitioners.

     Veena Luthra, for respondent.



                          MEMORANDUM OPINION



     TANNENWALD, Judge:     Respondent determined a deficiency in

petitioners' Federal income tax for the taxable year 1991 in the

amount of $36,783.00, as well as an addition to tax under section

6651(a)(1)1 in the amount of $8,819.75 and an accuracy-

     1
          Unless otherwise indicated, all section references are to
                                                     (continued...)
related penalty under section 6662(d) in the amount of $7,359.60.

The deficiency results from the disallowance of the carryover of

a net operating loss (NOL) of petitioner husband Douglas E. Kahle

(Mr. Kahle) from the 1990 taxable year.   The issue for decision

in this case is whether petitioners may use the NOL to reduce

income in the year in which petitioners filed for personal

bankruptcy.   Based on our decision with regard to this issue, we

will have to decide whether petitioners are liable for the

addition to tax for delinquent filing and an accuracy-related

penalty for substantial understatement of tax liability.



Background

     This case was submitted fully stipulated under Rule 122.

The stipulation of facts and attached exhibits are incorporated

herein by this reference and found accordingly.

     Petitioners are married individuals filing jointly, and

resided, at the time the petition in this case was filed, in

Virginia Beach, Virginia.   Their 1991 return was filed

delinquently on April 9, 1993, with the Internal Revenue Service

at Norfolk, Virginia.

     On December 6, 1991, Mr. Kahle filed a voluntary bankruptcy

petition under chapter 7 of the U.S. Bankruptcy Code in the U.S.

Bankruptcy Court, Eastern District of Virginia, Newport News

     1
      (...continued)
the Internal Revenue Code in effect for the taxable year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
Division.   He reported total liabilities in the amount of

$84,261,186.38, which he shared in part with various codebtors.

On March 18, 1992, he received a discharge from the Bankruptcy

Court of the total amount of the $84,261,186.38 debt.

     Mr. Kahle had an NOL for the taxable year 1990.    He did not

make a election pursuant to section 1398(d)(2) to adopt a short

taxable year ending on the date before the commencement date of

the bankruptcy.    On their 1991 return, petitioners claimed they

should be allowed to utilize Mr. Kahle's 1990 NOL, a claim which

respondent has disallowed.

Statutory Framework

     A bankruptcy estate is created in a voluntary case upon the

filing of the petition of bankruptcy.    Bankruptcy Code, 11 U.S.C.

secs. 301, 542 (1978).     At that time, certain tax attributes,

including any NOL's, determined as of the first day of the

debtor-taxpayer's taxable year in which the bankruptcy case

commences, become part of the estate, and no longer belong to the

debtor-taxpayer.   Sec. 1398(g).

     If the debtor-taxpayer makes an election under section

1398(d) to adopt a short taxable year ending on the date before

the commencement of the bankruptcy case, he or she may use an NOL

to reduce his or her income earned during that short taxable

year, and only any unused portion of the NOL becomes part of the

bankruptcy estate.    Sec. 1398(d)(2).
     Any remaining NOL belonging to the estate will be returned

to the debtor-taxpayer after the discharge in bankruptcy and

termination of the estate.   Sec. 1398(i).   The debtor is then

free to use the NOL as a carryforward, section 1398(i), or

carryback, as long as the NOL arose before the commencement of

the bankruptcy case, section 1398(j)(2)(B).

     Section 108(a) provides that debt discharged in bankruptcy

is not includable in gross income.   Section 108(b)(1) provides in

turn that, upon discharge, the taxpayer must reduce any tax

attributes by the amount of the debt discharged.    Section

108(b)(2) provides that NOL's are the first attribute to be

reduced, and section 108(b)(3) provides that they be reduced

dollar-for-dollar by the amount of the debt discharged in the

bankruptcy.   Section 108(b)(4)(A) provides that the reduction is

made "after the determination of the tax imposed by this chapter

for the taxable year of the discharge."   In the alternative, the

taxpayer can elect under section 108(b)(5) to first reduce the

basis of any depreciable property by the amount of debt

discharged, before reducing the amount of any tax attributes.

Importantly, section 108(d)(8) clarifies that the "taxpayer" for

purposes of section 108(b)(1) and (5) is the bankruptcy estate,

and not the individual debtor.
Discussion

     Petitioners argue that, even though they did not make the

short-taxable-year election under section 1398(d)(2), they should

be allowed to use the 1990 NOL in the year of discharge first to

reduce their 1991 income, before the inevitable reduction by the

amount of the discharge.   They base this argument on their

interpretation of section 108(b)(4) and section 108(d)(8).

Section 108(d)(8), which specifies the estate as the taxpayer,

does not specifically refer to the ordering rule of section

108(b)(4) and confines such reference to paragraphs (1) and (5)

of subsection (b) of section 108.   Thus, according to

petitioners, the reductions under section 108(b) occur after the

individual taxpayer, not the estate, determines his or her tax

liability for the year of discharge pursuant to section

108(b)(4), using whatever tax attributes are left in the

bankruptcy estate.   In other words, petitioners claim that the

individual taxpayer gets one last chance to use up the NOL before

it is reduced by the amount of debt discharged.

     We divide our analysis into two parts.

     First, we dispose of the question whether the 1990 NOL is

available to petitioners as a carryforward to 1991.      The answer

to this question is clearly in the negative.   Upon the filing of

the petition in bankruptcy on December 6, 1991, the NOL passed to

the bankrupt estate and belonged to the estate until discharge on

March 18, 1992.   Mr. Kahle did not file an election to adopt a

short taxable year in respect of which the 1990 NOL could have
been utilized.      Thus, at the end of 1991, the 1990 NOL was not

available to petitioners as a carryforward.2      Indeed, petitioners

do not contend otherwise.

       Second, we consider the question whether, as petitioners

contend, the 1990 NOL was extant at the time of Mr. Kahle's

discharge and became available as a carryback to 1991.        Here

again, the answer is clearly in the negative.       Section 108(d)(8)

applies to section 108(b)(1).       Section 108(b)(1) refers to

reductions provided for in section 108(b)(2).       Thus the reduction

which occurs under section 108(b) is determined by the bankrupt

estate, not the individual debtor.       Section 108(d)(8) does not

specifically refer to section 108(b)(4) because section 108(b)(4)

does not actually refer to a taxpayer but only to the

determination of tax liability.       Thus, the estate may use the tax

attributes to determine its tax liability for the year of

discharge, after which the tax attributes are reduced by the

estate under section 108(b)(2), before being returned to the

debtor-taxpayer.

       Such a reading comports with the overall purpose of the

statutory scheme.       It is clear from the statute that the price

the debtor-taxpayer pays for not including in income the amount

of the discharged debt is the surrender of certain enumerated tax

attributes, as provided for in sections 108(b)(1) and 1398(g) and

(i).       The legislative history confirms this view when it states:




       2
            See Beery v. Commissioner, T.C. Memo. 1996-464.
     The bill provides that the debt discharge amount thus
     excluded from income is applied to reduce the
     taxpayer's net operating losses and certain other tax
     attributes * * *. [S. Rept. 96-1035 (1980), 1980-2 C.B.
     620, 624.]

See also H. Rept. 96-833, 12 (1980).

     Moreover, section 108(d)(8) was enacted at the same time as

the reduction provisions of section 108(b)(1) and (2).    The same

Congress that wanted to reduce tax attributes as a price for tax-

free debt discharge was quite aware of who would be doing the

reducing--the estate, not the individual.

     Finally, if petitioners were correct, the debtor-taxpayer

would receive a windfall, a result which simply does not fit the

statutory scheme.   As the Court of Appeals for the Sixth Circuit

has stated in Firsdon v. United States, 95 F.3d 444, 447 (6th

Cir. 1996) (a case in which the Government prevailed on the issue

involved herein):

          Section 108(b) of the I.R.C. provides that any
     amount excluded from gross income under § 108(a) "shall
     be applied to reduce the tax attributes of the
     taxpayer," including NOLs. The obvious reason for this
     provision is to prevent bankrupt debtors from procuring
     a double benefit from the tax laws--a tax-free
     cancellation of debt plus favorable tax attributes from
     the bankrupt estate. * * *

     Petitioners do not argue that any of the 1990 NOL would

remain after discharge, and in fact appear to concede on brief

that the NOL ultimately would have been eliminated by operation

of section 108(b)(2)(A) and (3).    This concession comports with

the reality of the circumstances.   The NOL in question in this

case was in the amount of $136,773.    Mr. Kahle appears to have

had liabilities of over $84 million.    It is true that Mr. Kahle
shared these liabilities with various codebtors.   A large number

of codebtors could have reduced Mr. Kahle's share of the debt

discharged.   But, the discharge by the bankruptcy court did not

list so many codebtors as to make it likely that, in the end, Mr.

Kahle's share of the liability ultimately discharged could have

been less than the amount of the NOL, so that some portion of the

NOL would have been returned unused to him.   In addition, there

is no evidence in the record that there was any depreciable

property in the bankruptcy estate in respect of which an election

under section 108(b)(5) was made, nor did petitioners offer any

evidence that the basis of any such property could have been

reduced by the discharge of debt under section 108(b)(5) in place

of a reduction of the NOL.   In any event, the burden was on

petitioners to prove any such ameliorating circumstances.    Rule

142(a); Welch v. Helvering, 290 U.S. 111, 114 (1933).    That

burden is not lessened in a fully stipulated case.   Borchers v.

Commissioner, 95 T.C. 82, 91 (1990), affd. 943 F.2d 22 (8th Cir.

1991).

     In sum, we hold that the 1990 NOL was not available for use

by petitioners in 1991.   Firsdon v. United States, supra.

     Addition to Tax and Penalty

     Respondent determined an addition to tax for delinquency

under section 6651(a)(1) and a penalty for substantial

understatement under section 6662(d).   Petitioners have the

burden of proof.   Rule 142(a); Tippin v. Commissioner, 104 T.C.

518, 533 (1995).   Petitioners have conceded that the return for
the year at issue was filed delinquently and have offered no

other evidence on the issue of the addition to tax and penalty,

which they did not address on brief.   Accordingly, we sustain

respondent's determinations.   Tippin v. Commissioner, supra;

Murphy v. Commissioner, 103 T.C. 111, 119 (1994).

                               Decision will be entered

                         for respondent.
