What does the Tax Code state about the reduction of tax attributes due to canceled debt?

The Tax Code specifies the treatment of canceled debt and its impact on a debtor’s tax attributes, which includes various tax benefits such as net operating losses, credits, and basis in property. When debt is canceled, a debtor must first reduce their tax attributes according to a prescribed order, starting with the adjusted basis of property, then net operating losses, and eventually other tax attributes like credits. This structured approach ensures that the taxpayer's tax situation is adjusted correctly and in compliance with the regulations.

In addition, debtors also have flexibility within the framework of the tax code, as they can generally choose how to apply these reductions among their various tax attributes, effectively allowing them to control which attributes may experience a reduction in a given tax year.

Therefore, both the requirement of a specific order for reducing tax attributes and the debtor's ability to decide on the application of those reductions are key points recognized by the Tax Code regarding canceled debt. This dual element supports the accuracy of the assertion that both statements are true.