[Federal Register Volume 75, Number 156 (Friday, August 13, 2010)]
[Rules and Regulations]
[Pages 49394-49407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20060]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9497]
RIN 1545-BI97
Guidance Regarding Deferred Discharge of Indebtedness Income of
Corporations and Deferred Original Issue Discount Deductions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations under section
108(i) of the Internal Revenue Code (Code). These regulations primarily
affect C corporations regarding the acceleration of deferred discharge
of indebtedness (COD) income (deferred COD income) and deferred
original
[[Page 49395]]
issue discount (OID) deductions (deferred OID deductions) under section
108(i)(5)(D), and the calculation of earnings and profits as a result
of an election under section 108(i). In addition, these regulations
provide rules applicable to all taxpayers regarding deferred OID
deductions under section 108(i) as a result of a reacquisition of an
applicable debt instrument by an issuer or related party. The text of
these temporary regulations also serves as the text of proposed
regulations (REG-142800-09) set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules section in this issue
of the Federal Register.
DATES: Effective Dates: These regulations are effective on August 11,
2010.
Applicability Dates: For dates of applicability, see Sec.
1.108(i)-0T(b).
FOR FURTHER INFORMATION CONTACT: Concerning the acceleration rules for
deferred COD income and deferred OID deductions, and the rules for
earnings and profits, Robert M. Rhyne (202) 622-7790; concerning the
rules for deferred OID deductions, Rubin B. Ranat (202) 622-7530 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These temporary regulations are being issued without prior notice
and public procedure pursuant to the Administrative Procedure Act (5
U.S.C. 553). For this reason, the collection of information contained
in these regulations has been reviewed and, pending receipt and
evaluation of public comments, approved by the Office of Management and
Budget under control number 1545-2147. Responses to this collection of
information are required in order for a member of a consolidated group
to make the election described in Sec. 1.108(i)-1T(b)(3).
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
For further information concerning this collection of information,
and where to submit comments on the collection of information and the
accuracy of the estimated burden, and suggestions for reducing this
burden, please refer to the preamble to the cross-referencing notice of
proposed rulemaking on this subject in the Proposed Rules section in
this issue of the Federal Register.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. See 26 U.S.C. 6001.
Generally, tax returns and tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
Under section 61(a)(12), a taxpayer includes in gross income any
discharge of indebtedness (COD income) if the taxpayer's obligation to
repay its indebtedness is discharged in whole or in part. Section 108
provides special rules for the treatment of COD income in certain
cases.
Section 108(i) was added to the Code by section 1231 of the
American Recovery and Reinvestment Tax Act of 2009 (Pub. L. 111-5, 123
Stat. 338), enacted on February 17, 2009. Section 108(i)(1) provides an
election for deferral of the inclusion of COD income (deferred COD
income) arising in connection with the reacquisition after December 31,
2008, and before January 1, 2011, of an applicable debt instrument. If
a taxpayer makes the election, the deferred COD income generally is
includible in gross income ratably over a 5-taxable-year period,
beginning with the taxpayer's fourth or fifth taxable year following
the taxable year of the reacquisition (inclusion period). If, as part
of a reacquisition to which section 108(i)(1) applies, a debt
instrument is issued (or is treated as issued) for the applicable debt
instrument and there is any OID with respect to the newly issued debt
instrument, then the deduction for all or a portion of the OID may be
deferred (deferred OID deductions) under section 108(i)(2). (See the
discussion of section 108(i)(2) later in this preamble.)
An applicable debt instrument means any debt instrument (within the
meaning of section 1275(a)(1)) issued by a C corporation, or any other
person in connection with the conduct of a trade or business by such a
person. Section 108(i)(3). Section 108(i)(4)(A) defines a reacquisition
as any acquisition of the debt instrument by the debtor which issued
(or is otherwise the obligor under) the debt instrument, or by a person
related to the debtor within the meaning of section 108(e)(4). An
acquisition includes acquisitions for cash or other property, for
another debt instrument, for corporate stock or a partnership interest,
or as a contribution of the debt instrument to capital. The term also
includes the complete forgiveness of the indebtedness by the holder of
the debt instrument. Section 108(i)(4)(B).
Section 108(i)(5)(D) requires a taxpayer to accelerate the
inclusion of any remaining items of deferred COD income or deferred
(and otherwise allowable) OID deduction (deferred items) under certain
circumstances, including the death of the taxpayer, the liquidation or
sale of substantially all the assets of the taxpayer (including in a
title 11 or similar case), the cessation of business by the taxpayer,
or similar circumstances. Section 108(i)(7) authorizes the Secretary to
issue guidance necessary or appropriate for purposes of applying
section 108(i), including extending the application of the rules of
section 108(i)(5)(D) to other appropriate circumstances.
On August 17, 2009, the IRS and Treasury Department issued Rev.
Proc. 2009-37, 2009-36 IRB 309, providing procedures for taxpayers to
make a section 108(i) election, and requiring the annual reporting of
additional information. See Sec. 601.601(d)(2)(ii)(b). The revenue
procedure also announced the intention to issue additional guidance,
and that the additional guidance may be retroactive.
Explanation of Provisions
I. Mandatory Acceleration Events for Deferred COD Income
The IRS and Treasury Department believe that the deferral rules of
section 108(i) generally are intended to facilitate debt workouts and
to alleviate taxpayer liquidity concerns by deferring the tax liability
associated with COD income. These taxpayer-favorable deferral rules are
tempered, however, by section 108(i)(5)(D), which operates to
accelerate the inclusion of a taxpayer's remaining deferred COD income
in the case of the death of the taxpayer, the liquidation or sale of
substantially all the assets of the taxpayer (including in a title 11
or similar case), the cessation of business by the taxpayer or similar
circumstances (acceleration events).
A common trait of these enumerated acceleration events is that they
involve situations where collection of the tax liability associated
with a taxpayer's deferred COD income may be hindered, either because
the taxpayer has ceased to exist or because the taxpayer has disposed
of the business to which the COD income relates. Section 108(i) poses
unique concerns regarding collectability of the incipient tax liability
associated with deferred COD income. In other contexts in which gain or
income is deferred, the deferral is generally associated with a
particular asset or its replacement. For example, gain on the sale of
an asset under the installment method of accounting is deferred until
payments are received under the installment obligation, or until the
taxpayer disposes of the installment obligation. Collectability of
[[Page 49396]]
the tax liability associated with the deferred gain is preserved in
that context because the taxpayer has either the installment obligation
or the proceeds therefrom. Section 108(i) deferral, in contrast, is not
linked to a particular asset or a particular replacement asset. In the
absence of acceleration events, the government's ability to ensure
appropriate inclusion of the deferred COD income and the collectability
of the associated tax liability would be jeopardized.
The enumerated acceleration events apply, however, to a broad range
of taxpayers, including individuals and passthrough entities as well as
corporations. Applied literally, the statutory rules would require
acceleration in circumstances, such as certain corporate nonrecognition
transactions, that do not pose particular concerns regarding
collectability. For example, the statute treats a sale of substantially
all the assets of the taxpayer as an acceleration event. If construed
broadly, any asset disposition involving the transfer of substantially
all of the assets of a corporation that made a section 108(i) election
(for example, a reorganization exchange described in section
368(a)(1)(C)) would constitute an acceleration event. However,
commentators noted that it did not seem consistent with the purposes of
section 108(i) to require the acceleration of an electing corporation's
deferred items in the case of a transaction to which section 381(a)
applies. As discussed further in this preamble, the IRS and Treasury
Department generally agree.
The rules provided in these temporary regulations with respect to a
C corporation with deferred COD income by reason of a section 108(i)
election (electing corporation) are intended to focus more precisely on
the underlying purpose of section 108(i)(5)(D) to ensure that the
government's ability to collect the tax liability associated with the
deferred COD income is not impaired. Thus, with respect to electing
corporations, the rules provided in these regulations generally reflect
a narrower interpretation of the statutory acceleration events.
In addition, however, the nature of the corporate entity introduces
concerns not present for other types of taxpayers. In particular, a
corporation can dissipate its assets (for example, by distributions to
its shareholders) without harming the economic interests of its
shareholders. As a result, there may be a greater incentive for the
owners of a corporation to make the corporation judgment-proof with
respect to its tax liability. This is illustrated by the intermediary
transactions described in Notice 2008-111, 2008-2 CB 1299. The IRS and
Treasury Department believe that the acceleration rules should be
tailored to foreclose such opportunities.
Accordingly, while these temporary regulations do not require
acceleration in every instance enumerated in the statute, they provide
instead for acceleration in a limited number of circumstances in which
corporations have impaired their ability to pay their incipient tax
liability. This approach is broadly consistent with the approach
advanced by commentators who suggested, for example, that a transfer of
a corporation's business assets for stock in a section 351 exchange
should not be an acceleration event, despite the literal language of
section 108(i)(5)(D).
Specifically, these temporary regulations generally provide that an
electing corporation will accelerate deferred COD income under section
108(i)(5)(D) if the electing corporation (i) changes its tax status,
(ii) ceases its corporate existence in a transaction to which section
381(a) does not apply, or (iii) engages in a transaction that impairs
its ability to pay the tax liability associated with its deferred COD
income (the net value acceleration rule). Under these temporary
regulations, the foregoing three rules are the only events that
accelerate an electing corporation's deferred COD income. In addition
to these temporary regulations, however, the rules under Sec.
1.108(i)-2T apply to C corporations that are direct or indirect
partners of a partnership.
The acceleration rules provided in these temporary regulations
generally are different from the rules for passthrough entities. For
example, a sale of substantially all of the assets of a passthrough
entity is an acceleration event for an S corporation while that
transaction, standing alone, is not an acceleration event for an
electing corporation. The IRS and Treasury Department believe that it
is appropriate to provide different acceleration rules for passthrough
entities and electing corporations because the statute requires the
debt instrument of a passthrough entity to be issued in connection with
a trade or business. Accordingly, consistent with the trade or business
requirement, it is appropriate to accelerate the deferred COD income of
a passthrough entity if the entity sells substantially all of its
assets.
A. Net Value Acceleration Rule
Under the net value acceleration rule, an electing corporation
generally is required to accelerate all of its remaining deferred COD
income if it engages in an impairment transaction, and immediately
after the transaction, the value of its assets fails to satisfy a
minimum threshold (as further described herein). In general, impairment
transactions are volitional transactions that reduce an electing
corporation's asset base.
As provided in these regulations, impairment transactions are any
transactions, however effected, that impair an electing corporation's
ability to pay the amount of Federal income tax liability on its
deferred COD income and include, for example, distributions (including
section 381(a) transactions), redemptions, below market sales, and
donations, and the incurrence of additional indebtedness without a
corresponding increase in asset value. However, value-for-value sales
or exchanges (including, for example, an exchange to which section 351
or section 721 applies) are not impairment transactions. The IRS and
Treasury Department believe that the receipt of replacement assets in
these cases adequately protects the government's interests and ensures
continued collectability of any incipient tax liability. Under this
rule, an electing corporation's investments and expenditures in
pursuance of its good faith business judgment are not impairment
transactions, merely because, for example, acquired assets are riskier
or less liquid than the electing corporation's previous assets. In
addition, mere declines in the market value of an electing
corporation's assets are not impairment transactions. Although the
decline may impair an electing corporation's ability to pay its tax
liability, a different rule would require continuous valuations and is
contrary to the transactional approach taken in the statute and these
regulations, and the realization requirement generally.
Under the net value acceleration rule, an electing corporation
generally is required to accelerate its remaining deferred COD income
if immediately after an impairment transaction, the gross value of the
corporation's assets (gross asset value) is less than one hundred and
ten percent of the sum of its total liabilities and the tax on the net
amount of its deferred items (the net value floor). Solely for purposes
of computing the net value floor, the tax on the net amount of the
electing corporation's deferred items is determined by applying the
highest rate of tax specified in section 11(b) for the taxable year
(even though the corporation's actual tax rate for the taxable year may
differ).
The net value acceleration rule has a mitigating provision that
allows an
[[Page 49397]]
electing corporation to avoid accelerated inclusion of its deferred COD
income if value is restored to the corporation by the due date of the
electing corporation's tax return (including extensions). In general,
the amount required to be restored is the lesser of: (i) The amount of
value that was removed (net of amounts previously restored under this
rule) from the electing corporation in one or more impairment
transactions; or (ii) the amount by which the electing corporation's
net value floor exceeds its gross asset value. For example, assume an
electing corporation incurs $50 of indebtedness, distributes the $50 of
proceeds to its shareholder, and immediately after the distribution,
the electing corporation's gross asset value is $25 below the net value
floor. The electing corporation may avoid application of the net value
acceleration rule if, as a result of a transaction, assets with a value
of $25 are restored to the corporation before the due date of its tax
return (including extensions) for the taxable year that includes the
distribution. For purposes of this provision, the value that must be
restored is determined at the time of the impairment transaction, and
is determined upon a net value basis (for example, additional
borrowings by an electing corporation do not restore value).
The IRS and Treasury Department believe that the net value
acceleration rule is an appropriate interpretation of section 108(i)
because, consistent with the purpose of facilitating workouts, the rule
allows electing corporations the flexibility to realign business
operations through strategic acquisitions and dispositions within the
objective standard of the net value floor. Although the net value
acceleration rule contains a valuation component, a valuation will be
required only if an electing corporation engages in an impairment
transaction. Moreover, the IRS and Treasury Department believe that the
net value acceleration rule is a more objective rule than requiring
corporations to determine the amount of business assets that would have
to be retained simply to preserve the deferral benefit of section
108(i).
1. Consolidated Groups
In the case of consolidated groups, the determination of whether an
electing corporation that is a member of a consolidated group (electing
member) has engaged in an impairment transaction is made on a group-
wide basis. Thus, an electing member is treated as engaging in an
impairment transaction if any member's transaction impairs the group's
ability to pay the tax liability associated with the group's deferred
COD income. See Sec. 1.1502-6. Accordingly, intercompany transactions
are not impairment transactions. Similarly, the net value acceleration
rule is applied by reference to the gross asset value of all members
(excluding stock of members whether or not the stock is described in
section 1504(a)(4)), the liabilities of all members, and the tax on all
members' deferred items. For example, assume P is the common parent of
the P-S consolidated group, S has a section 108(i) election in effect,
and S makes a $100 distribution to P, which, on a separate entity
basis, would reduce S's gross asset value below the net value floor.
S's intercompany distribution to P is not an impairment transaction.
However, if P makes a $100 distribution to its shareholder, P's
distribution, subject to an exception described in section I.A.2 of
this preamble, is an impairment transaction, and the net value
acceleration rule is applied by reference to the assets, liabilities,
and deferred items of the P-S group.
Special rules are provided when an electing member that previously
engaged in an impairment transaction on a separate entity basis leaves
a consolidated group. If the electing member ceases to be a member of a
consolidated group, the cessation is treated as an impairment
transaction and the net value acceleration rule is applied on a
separate entity basis (by reference to the assets, liabilities, and
deferred items of the electing member only) immediately after it ceases
to be a member. If the electing member's gross asset value is less than
the net value floor, then the electing member's remaining deferred COD
income must be taken into account immediately before the electing
member ceases to be a member (unless value is restored). In the case of
an electing member that becomes a member of another consolidated group,
the cessation is treated as an impairment transaction and the net value
acceleration rule is applied by reference to the assets, liabilities,
and deferred items of the members of the acquiring group immediately
after the transaction. If the gross asset value of the acquiring group
is less than its net value floor, the electing member's remaining
deferred COD income is taken into account immediately before the
electing member ceases to be a member of the former group. If
accelerated inclusion is not required, the common parent of the
acquiring group succeeds to the reporting requirements of section
108(i) with respect to the electing member.
2. Exception for Distributions and Charitable Contributions Consistent
With Historical Practice--In General
The IRS and Treasury Department believe it is appropriate to allow
an electing corporation to continue to make distributions to the extent
the distributions are consistent with its historical practice.
Accordingly, these distributions are not treated as impairment
transactions (and are not taken into account as a reduction in gross
asset value when applying the net value acceleration rule to any
impairment transaction). For this purpose, distributions are consistent
with an electing corporation's historical practice to the extent the
distributions are described in section 301(c) and the amount of these
distributions, in the aggregate, for the applicable taxable year
(applicable distribution amount) does not exceed the annual average
amount of section 301(c) distributions over the preceding three taxable
years (average distribution amount). Any excess of the applicable
distribution amount over the average distribution amount is treated as
an impairment transaction and is taken into account when applying the
net value acceleration rule. For purposes of this rule, appropriate
adjustments must be made to take into account any issuances or
redemptions of stock, or similar transactions, occurring during a
relevant taxable year. In addition, if the electing corporation has a
short taxable year for the year of the distribution or for any of the
years relied upon in computing the average distribution amount, the
applicable distribution amount and the average distribution amount are
determined on an annualized basis. If an electing corporation has been
in existence for less than three years, the average distribution amount
is computed by substituting the period during which the electing
corporation has been in existence for the three preceding taxable
years. The regulations also provide similar rules that exclude from
impairment transaction status an electing corporation's charitable
contributions (within the meaning of section 170(c)) that are
consistent with its historical practice.
3. Special Rules for Regulated Investment Companies (RICs) and Real
Estate Investment Trusts (REITs)
In the case of a RIC or REIT, any distributions with respect to
stock that are treated as a dividend under section 852 or 857 are not
treated as impairment transactions (and are not taken into
[[Page 49398]]
account as a reduction in gross asset value when applying the net value
acceleration rule to any impairment transaction). In addition, any
redemption of a redeemable security, as defined in 15 U.S.C. section
80a-2(a)(32), by a RIC in the ordinary course of business is not
treated as an impairment transaction (and is not taken into account as
a reduction in gross asset value when applying the net value
acceleration rule to any impairment transaction).
B. Other Mandatory Acceleration Events
1. Changes in Tax Status
To preserve the government's ability to collect the incipient tax
liability associated with a C corporation's deferred COD income, these
regulations provide that an electing corporation must take into account
its remaining deferred COD income immediately before a change in its
tax status. An example of such a change includes a C corporation that
becomes a tax-exempt entity, or a C corporation that begins operating
as a cooperative. Other changes in tax status are more fully described
herein.
If a C corporation elects to be treated as an S corporation, the S
corporation is subject to tax on its net recognized built-in gains
during the recognition period. Section 1374(a). Although an item of
income, such as deferred COD income, can constitute recognized built-in
gain, recognition of the gain for any taxable year may be limited under
Sec. 1.1374-2. Accordingly, if an electing corporation elects to be
treated as an S corporation, the S corporation would not pay tax on its
deferred COD income to the extent that the S corporation's COD income
and other recognized built-in gains exceed the limitation.
The IRS and Treasury Department have determined that permanent
exclusion of a corporate tax liability associated with a section 108(i)
election is inconsistent with congressional intent to provide for
deferral of corporate tax liability with respect to COD income.
Accordingly, these temporary regulations provide that if an electing
corporation elects to become an S corporation, the C corporation must
take into account its deferred COD income immediately before the S
corporation election is effective.
Similarly, these temporary regulations provide that an electing
corporation that elects to be treated as a RIC or REIT must take into
account its remaining deferred COD income immediately before the
election is effective.
2. Cessation of Existence
Section 108(i)(5)(D) provides that in the case of the cessation of
business by a taxpayer, deferred items must be taken into account in
the taxable year of the cessation. Consistent with this provision, in
general, these temporary regulations provide that an electing
corporation must accelerate its remaining deferred COD income in the
taxable year that the corporation ceases to exist.
As noted in section I of the preamble, commentators suggested that
continued deferral of an electing corporation's COD income is
appropriate if the corporation ceases to exist in a reorganization or
liquidation to which section 381(a) applies. The IRS and Treasury
Department agree that, in these transactions, the policies that support
nonrecognition for corporations also support continued deferral of COD
income. In addition, an exception for these transactions affords
corporations maximum flexibility in structuring transactions as asset
reorganizations or stock reorganizations to meet business exigencies.
Therefore, these temporary regulations generally provide that if
the assets of the electing corporation are acquired in a transaction to
which section 381(a) applies (the section 381 exception), the electing
corporation's deferred COD income is not accelerated. In such a case,
the acquiring corporation succeeds to the electing corporation's
remaining deferred COD income, and becomes subject to section 108(i),
including all of its reporting requirements. However, these temporary
regulations limit the applicability of the section 381 exception in
certain circumstances, some of which are described herein. Moreover, a
section 381(a) transaction may still constitute an impairment
transaction. (See Example 3 of Sec. 1.108(i)-1T(c)).
a. Outbound Section 381(a) Transactions
If the assets of a domestic electing corporation are acquired by a
foreign corporation in a transaction to which section 381(a) applies,
the electing corporation's deferred COD income may not be subject to
U.S. tax when it is includible in the foreign acquirer's gross income.
Accordingly, to ensure that the COD income is appropriately taxed,
these temporary regulations provide that the electing corporation takes
into account its remaining deferred COD income immediately before the
transaction.
b. Inbound Section 381(a) Transactions
As more fully described in section III, in general, deferred COD
income increases the earnings and profits of an electing corporation,
including a foreign electing corporation, in the year the debt is
discharged. Accordingly, if the assets of a foreign electing
corporation are acquired by a domestic corporation in a transaction to
which section 381(a) applies, the increase in earnings and profits is
taken into account in computing the foreign corporation's all earnings
and profits amount and therefore, may be subject to U.S. taxation as a
deemed dividend pursuant to Sec. 1.367(b)-3(b)(3). To prevent the
deferred COD income from being subject to U.S. tax a second time when
the deferred COD income is includible in the domestic acquirer's gross
income, these temporary regulations provide that a foreign electing
corporation takes into account its remaining deferred COD income
immediately before the transaction if, as a result of the transaction,
one or more exchanging shareholders include in income as a deemed
dividend the all earnings and profits amount with respect to stock in
the foreign electing corporation pursuant to Sec. 1.367(b)-3(b)(3).
c. Acquisition of Assets of an Electing Corporation by a RIC or REIT or
by an S Corporation
To ensure that the corporate tax liability associated with deferred
COD income is appropriately preserved, these temporary regulations
provide that if the assets of an electing corporation are acquired by a
RIC or REIT in a transaction that is subject to Sec. 1.337(d)-7 and
section 381(a) (a conversion transaction), the electing corporation
takes into account its remaining deferred COD income immediately before
the conversion transaction. Similarly, if the assets of an electing C
corporation are acquired by an S corporation in a transaction to which
sections 1374(d)(8) and section 381(a) apply, the electing C
corporation takes into account its remaining deferred COD income
immediately before the transaction.
C. Title 11 (or Similar Case)
Under section 108(i)(5)(D), if an electing corporation ceases to do
business, liquidates or sells substantially all of its assets in a
proceeding under title 11 (or a similar case), the corporation's
deferred items are taken into account the day before the petition is
filed. The IRS and Treasury Department believe that the acceleration
rules (outlined in section I) are
[[Page 49399]]
sufficient to protect the collectability of tax relating to deferred
COD income. Accordingly, no special acceleration rules for an electing
corporation in a title 11 or similar case are provided.
II. Elective Acceleration for Electing Members of a Consolidated Group
These temporary regulations provide an elective provision under
which an electing member of a consolidated group (other than the common
parent) may at any time accelerate in full (and not in part) the
inclusion of its remaining deferred COD income with respect to all
applicable debt instruments. Elective acceleration within a
consolidated group is consistent with other consolidated return
provisions that mitigate the double taxation of income or gain.
III. Earnings and Profits
In Rev. Proc. 2009-37, the IRS and Treasury Department announced
its intention to issue regulations regarding the computation of a
corporation's earnings and profits in connection with an election under
section 108(i). See Sec. 601.601(d)(2)(ii)(b). Consistent with the
revenue procedure, these temporary regulations provide that deferred
COD income generally increases earnings and profits in the taxable year
that it is realized, and deferred OID deductions generally decrease
earnings and profits in the taxable year or years in which the
deductions would be allowed without regard to the deferral rules of
section 108(i).
Although Sec. 1.312-6(a) generally states that adjustments to
earnings and profits are dependent upon the method of accounting
properly employed in computing taxable income (or net income, as the
case may be), the IRS and Treasury Department believe this principle
should not apply in the case of an electing corporation.
Section 312(n)(5) provides that in the case of any installment
sale, earnings and profits shall be computed as if the corporation did
not use the installment sale method. Some commentators have suggested
that because the deferral of COD income under section 108(i) is
analogous to the deferral of gain from an installment sale, a rule
consistent with section 312(n)(5) should apply for purposes of
determining the timing of adjustments to earnings and profits with
respect to deferred items under section 108(i). The IRS and Treasury
Department agree that the policies underlying section 312(n) inform the
treatment of deferred COD income under section 108(i).
The legislative history to section 312(n)(5) focuses on the fact
that a taxpayer may realize cash or its equivalent under the
installment method in the year of the sale, but is not required to take
income into account until later years. S. Rep. No. 98-169, at 198-99
(1984). As in the case of an installment sale, an electing corporation
realizes economic income in the year of discharge. Even though the
electing corporation is not required to recognize income until later
years, its dividend paying capacity is enhanced immediately, not during
the inclusion period, or at the time the deferred COD income may be
accelerated into income.
These temporary regulations also provide certain exceptions to
current year adjustments to earnings and profits. In the case of RICs
and REITs, deferred COD income increases earnings and profits in the
taxable year or years in which the deferred COD income is includible in
gross income and not in the year that the deferred COD income is
realized, and deferred OID deductions decrease earnings and profits in
the taxable year or years that the deferred OID deductions are
deductible. This rule is intended to ensure that a RIC or REIT has
sufficient earnings and profits to claim a dividends paid deduction in
the taxable year that the deferred COD income is included in taxable
income. In addition, for purposes of calculating alternative minimum
taxable income, deferred items increase or decrease, as the case may
be, adjusted current earnings under section 56(g)(4) in the taxable
year or years that the item is includible or deductible.
IV. Deferred OID Deductions
Section 108(i)(2) generally provides that if, as part of a
reacquisition to which section 108(i)(1) applies, a debt instrument is
issued (or is treated as issued under section 108(e)(4)) for the
applicable debt instrument being reacquired and there is any OID with
respect to the debt instrument, no deduction otherwise allowable is
allowed for the portion of the OID that accrues before the inclusion
period and that does not exceed the COD income with respect to the
applicable debt instrument being reacquired. The aggregate amount of
deferred OID deductions is allowed ratably over the inclusion period.
If the amount of OID accruing before the inclusion period exceeds the
deferred COD income with respect to the applicable debt instrument
being reacquired, the deductions are disallowed in the order in which
the OID is accrued.
Under section 108(i)(2)(B), if a debt instrument is issued by an
issuer and the proceeds of the debt instrument are used directly or
indirectly by the issuer to reacquire an applicable debt instrument of
the issuer, then the debt instrument is treated as issued for the
applicable debt instrument being reacquired. If only a portion of the
proceeds of the debt instrument are used directly or indirectly to
reacquire the applicable debt instrument, then the rules in section
108(i)(2)(A) apply to the portion of any OID on the debt instrument
that is equal to the portion of the proceeds used to reacquire the
applicable debt instrument.
A. Application of Sec. 1.1502-13(g)(5)
The intercompany obligation rules of Sec. 1.1502-13(g) operate to
minimize the effect on consolidated taxable income of items of income,
gain, deduction, or loss arising from intercompany debt. These rules
generally match the amount, timing, and character of the creditor and
debtor member's items, and ensure that future items similarly
correspond. Thus, for example, assume that S holds a B note with an
adjusted issue price and basis of $100 and a fair market value of $70,
and that S sells the B note to a nonmember for $70. Under Sec. 1.1502-
13(g)(3), B is deemed, immediately before the sale to X, to satisfy the
note for its fair market value of $70, resulting in $30 of COD income
for B and $30 of loss for S (which is treated as ordinary loss under
the attribute redetermination rule of Sec. 1.1502-13(c)(4)(i)).
Because the debtor's COD income matches the creditor's ordinary loss,
in cases where the intercompany obligation becomes a non-intercompany
obligation (and in intragroup transactions), there is no benefit to the
group to elect deferral of COD income under section 108(i).
However, for those transactions in which a non-intercompany
obligation becomes an intercompany obligation (as described in Sec.
1.1502-13(g)(5)), the timing and attributes of the debtor and creditor
member's items from the deemed satisfaction are determined on a
separate entity basis. In such cases, the elective deferral rules of
section 108(i) may be beneficial. Accordingly, these temporary
regulations limit the application of section 108(i) by providing that
in the case of an intercompany obligation (as defined in Sec. 1.1502-
13(g)(2)(ii)), the term applicable debt instrument includes only a debt
instrument for which COD income is realized upon the debt instrument's
deemed satisfaction under Sec. 1.1502-13(g)(5).
B. Deemed Debt-for-Debt Exchanges
Pursuant to the regulatory authority in section 108(i)(7), the
temporary regulations provide that, for purposes of section 108(i)(2)
(relating to deferred
[[Page 49400]]
OID deductions that arise in certain debt-for-debt exchanges involving
the reacquisition of an applicable debt instrument), if the proceeds of
any debt instrument are used directly or indirectly by the issuer or a
person related to the issuer (within the meaning of section
108(i)(5)(A)) to reacquire an applicable debt instrument, the debt
instrument shall be treated as issued for the applicable debt
instrument being reacquired. Therefore, section 108(i)(2) may apply,
for example, to a debt instrument issued by a corporation for cash in
which some or all of the proceeds are used directly or indirectly by
the corporation's related subsidiary in the reacquisition of the
subsidiary's applicable debt instrument. The rule in the temporary
regulations is intended to prevent related parties from avoiding the
rules for deferred OID deductions.
C. Directly or Indirectly
In response to comments received by the IRS and Treasury
Department, the temporary regulations provide principles similar to
those of Sec. 1.279-3(b) for purposes of determining when the proceeds
of a debt instrument will be treated as having been used ``directly or
indirectly'' to reacquire an applicable debt instrument. Generally,
whether the proceeds from an issuance of a debt instrument are used
directly or indirectly by the issuer of the debt instrument or a person
related to the issuer to reacquire an applicable debt instrument will
depend upon all of the facts and circumstances surrounding the issuance
and the reacquisition. The proceeds of an issuance of a debt instrument
will be treated as being used indirectly to reacquire an applicable
debt instrument if: (i) At the time of the issuance of the debt
instrument, the issuer of the debt instrument anticipated that an
applicable debt instrument of the issuer or a person related to the
issuer would be reacquired by the issuer, and the debt instrument would
not have been issued if the issuer had not so anticipated such
reacquisition; (ii) at the time of the issuance of the debt instrument,
the issuer of the debt instrument or a person related to the issuer
anticipated that an applicable debt instrument would be reacquired by a
related person and the related person receives cash or property that it
would not have received unless the reacquisition had been so
anticipated; or (iii) at the time of the reacquisition, the issuer or a
person related to the issuer foresaw or reasonably should have foreseen
that it would be required to issue a debt instrument, which it would
not have otherwise been required to issue if the reacquisition had not
occurred, in order to meet its future economic needs.
D. Proportional Rule for Accruals of OID
If a portion of the proceeds of a debt instrument with OID are used
directly or indirectly to reacquire an applicable debt instrument, then
the temporary regulations provide that the amount of the issuer's
deferred OID deductions generally is equal to the product of the amount
of OID that accrues in the taxable year under section 1272 or section
1275 (and the regulations under those sections), whichever section is
applicable, and a fraction, the numerator of which is the portion of
the total proceeds of the debt instrument used directly or indirectly
to reacquire the applicable debt instrument and the denominator of
which is the total proceeds of the debt instrument. However, if the
total amount of OID that accrues before the inclusion period is greater
than the total amount of deferred COD income under section 108(i), then
the OID deductions are disallowed in the order in which the OID is
accrued, subject to the total amount of deferred COD income.
E. Acceleration Events for Deferred OID Deductions
The temporary regulations provide rules for the acceleration of
deferred OID deductions by an issuer that is a C corporation (C
corporation issuer). The IRS and Treasury Department believe that it is
appropriate to accelerate deferred OID deductions with respect to a
debt instrument when the corresponding deferred COD income is taken
into account. Accordingly, these temporary regulations provide that all
or a portion of a C corporation issuer's deferred OID deductions with
respect to a debt instrument are taken into account to the extent that
an electing entity or its owners include all or a portion of the
deferred COD income to which the C corporation issuer's deferred OID
deductions relate.
These temporary regulations also include special rules to
accelerate a C corporation issuer's remaining deferred OID deductions
even though the deferred COD income to which it relates continues to be
deferred. Under these rules, a C corporation issuer takes into account
all of its remaining deferred OID deductions if the issuer (i) changes
its tax status, or (ii) ceases to exist in a transaction to which
section 381(a) does not apply, taking into account the application of
Sec. 1.1502-34. See Sec. 1.1502-80(g).
With respect to all taxpayers with deferred OID deductions, the
temporary regulations also provide that any remaining deferred OID
deductions are not accelerated solely by reason of the retirement of
any debt instrument subject to section 108(i)(2).
V. Effective/Applicability Dates
In general, the rules regarding deferred COD income and the
calculation of earnings and profits apply to reacquisitions of
applicable debt instruments in taxable years ending after December 31,
2008. In addition, the rules regarding deferred OID deductions
generally apply to debt instruments issued after December 31, 2008 in
connection with the reacquisition of an applicable debt instrument.
However, the rules with respect to the acceleration of deferred COD
income and deferred OID deductions apply prospectively to acceleration
events occurring on or after August 11, 2010. Electing corporations and
C corporation issuers are given the option to apply these rules to all
acceleration events occurring prior to August 11, 2010 by taking a
return position consistent with these provisions. In the case of a
consolidated group, this option is available only if the acceleration
rules are applied to all acceleration events with respect to all
members of the group. In addition, certain transitional rules are
provided in order to allow electing corporations the ability to use
provisions in the acceleration rules that are time sensitive.
To the extent an electing corporation or C corporation issuer does
not apply these acceleration rules to acceleration events occurring
prior to August 11, 2010, then all deferred items are subject to the
rules of section 108(i)(5)(D)(i).
Comments
The text of these temporary regulations also serves as the text of
the proposed regulations set forth in the notice of proposed rulemaking
on this subject in the Proposed Rules section in this issue of the
Federal Register. Please see the ``Comments and Requests for a Public
Hearing'' section of the notice of proposed rulemaking for the
procedures to follow in submitting comments on the proposed regulations
on this subject.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. For applicability
of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the
Special Analyses section of the preamble to the cross-referenced notice
of proposed rulemaking published in
[[Page 49401]]
the Proposed Rules section in this issue of the Federal Register.
Pursuant to section 7805(f) of the Code, these regulations will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Section 108(i) applies to the reacquisition of an applicable debt
instrument during the brief election period, January 1, 2009 through
December 31, 2010. These temporary regulations provide necessary
guidance regarding the application of this new section 108(i) in order
for corporations to timely file their tax returns. For this reason, it
has been determined pursuant to 5 U.S.C. 553(b)(3)(B), that prior
notice and public procedure are impracticable and contrary to the
public interest. For the same reason, it has been determined pursuant
to 5 U.S.C. 553(d)(3) that good cause exists for not delaying the
effective date of these temporary regulations.
Drafting Information
The principal authors of these regulations are Robert M. Rhyne and
Rubin B. Ranat of the Office of Associate Chief Counsel (Corporate).
Other personnel from the IRS and Treasury Department participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding the
entry for Sec. 1.108(i)-0T, Sec. 1.108(i)-1T, and Sec. 1.108(i)-3T,
to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.108(i)-0T also issued under 26 U.S.C. 108(i)(7) and
1502. * * *
Section 1.108(i)-1T also issued under 26 U.S.C. 108(i)(7) and
1502. * * *
Section 1.108(i)-3T also issued under 26 U.S.C. 108(i)(7) and
1502. * * *
0
Par. 2. Section 1.108(i)-0T is added to read as follows:
Sec. 1.108(i)-0T Definitions (temporary).
(a) Definitions. For purposes of regulations under section 108(i)--
(1) Acquisition. An acquisition, with respect to any applicable
debt instrument, includes an acquisition of the debt instrument for
cash or other property, the exchange of the debt instrument for another
debt instrument (including an exchange resulting from a modification of
the debt instrument), the exchange of the debt instrument for corporate
stock or a partnership interest, the contribution of the debt
instrument to capital, the complete forgiveness of the indebtedness by
the holder of the debt instrument, and a direct or an indirect
acquisition within the meaning of Sec. 1.108-2;
(2) Applicable debt instrument. An applicable debt instrument is a
debt instrument that was issued by a C corporation or any other person
in connection with the conduct of a trade or business by such person.
In the case of an intercompany obligation (as defined in Sec. 1.1502-
13(g)(2)(ii)), applicable debt instrument includes only an instrument
for which COD income is realized upon the instrument's deemed
satisfaction under Sec. 1.1502-13(g)(5);
(3) C corporation issuer. C corporation issuer means a C
corporation that issues a debt instrument with any deferred OID
deduction;
(4) C corporation partner. A C corporation partner is a C
corporation that is a direct or indirect partner of an electing
partnership or a related partnership;
(5) COD income. COD income means income from the discharge of
indebtedness, as determined under sections 61(a)(12) and 108(a) and the
regulations under those sections;
(6) COD income amount. A COD income amount is a partner's
distributive share of COD income with respect to an applicable debt
instrument of an electing partnership;
(7) Debt instrument. Debt instrument means a bond, debenture, note,
certificate, or any other instrument or contractual arrangement
constituting indebtedness (within the meaning of section 1275(a)(1));
(8) Deferral period. For a reacquisition that occurs in 2009,
deferral period means the taxable year of the reacquisition and the
four taxable years following such taxable year. For a reacquisition
that occurs in 2010, deferral period means the taxable year of the
reacquisition and the three taxable years following such taxable year;
(9) Deferred amount. A deferred amount is the portion of a
partner's COD income amount with respect to an applicable debt
instrument that is deferred under section 108(i);
(10) Deferred COD income. Deferred COD income means COD income that
is deferred under section 108(i);
(11) Deferred item. A deferred item is any item of deferred COD
income or deferred OID deduction that has not been previously taken
into account under section 108(i);
(12) Deferred OID deduction. A deferred OID deduction means an
otherwise allowable deduction for OID that is deferred under section
108(i)(2) with respect to a debt instrument issued (or treated as
issued under section 108(e)(4)) in a debt-for-debt exchange described
in section 108(i)(2)(A) or a deemed debt-for-debt exchange described in
Sec. 1.108(i)-3T(a);
(13) Deferred section 465 amount. A deferred section 465 amount is
described in paragraph (d)(3) of Sec. 1.108(i)-2T;
(14) Deferred section 752 amount. A deferred section 752 amount is
described in paragraph (b)(3) of Sec. 1.108(i)-2T;
(15) Direct partner. A direct partner is a person that owns a
direct interest in a partnership;
(16) Electing corporation. An electing corporation is a C
corporation with deferred COD income by reason of a section 108(i)
election;
(17) Electing entity. An electing entity is an entity that is a
taxpayer that makes an election under section 108(i);
(18) Electing member. An electing member is an electing corporation
that is a member of an affiliated group that files a consolidated
return;
(19) Electing partnership. An electing partnership is a partnership
that makes an election under section 108(i);
(20) Electing S corporation. An electing S corporation is an S
corporation that makes an election under section 108(i);
(21) Included amount. An included amount is the portion of a
partner's COD income amount with respect to an applicable debt
instrument that is not deferred under section 108(i) and is included in
the partner's distributive share of partnership income for the taxable
year of the partnership in which the reacquisition occurs;
(22) Inclusion period. The inclusion period is the five taxable
years following the last taxable year of the deferral period;
(23) Indirect partner. An indirect partner is a person that owns an
interest in a partnership through an S corporation and/or one or more
partnerships;
(24) Issuing entity. An issuing entity is any entity that is--
(i) A related partnership;
(ii) A related S corporation;
[[Page 49402]]
(iii) An electing partnership that issues a debt instrument (or is
treated as issuing a debt instrument under section 108(e)(4)) in a
debt-for-debt exchange described in section 108(i)(2)(A) or a deemed
debt-for-debt exchange described in Sec. 1.108(i)-3T(a); or
(iv) An electing S corporation that issues a debt instrument (or is
treated as issuing a debt instrument under section 108(e)(4)) in a
debt-for-debt exchange described in section 108(i)(2)(A) or a deemed
debt-for-debt exchange described in Sec. 1.108(i)-3T(a);
(25) OID. OID means original issue discount, as determined under
sections 1271 through 1275 (and the regulations under those sections).
If the amount of OID with respect to a debt instrument is less than a
de minimis amount as determined under Sec. 1.1273-1(d), the OID is
treated as zero for purposes of section 108(i)(2);
(26) Reacquisition. A reacquisition, with respect to any applicable
debt instrument, is any event occurring after December 31, 2008 and
before January 1, 2011, that causes COD income with respect to such
applicable debt instrument, including any acquisition of the debt
instrument by the debtor that issued (or is otherwise the obligor
under) the debt instrument or a person related to such debtor (within
the meaning of section 108(i)(5)(A));
(27) Related partnership. A related partnership is a partnership
that is related to the electing entity (within the meaning of section
108(i)(5)(A)) and that issues a debt instrument in a debt-for-debt
exchange described in section 108(i)(2)(A) or a deemed debt-for-debt
exchange described in Sec. 1.108(i)-3T(a);
(28) Related S corporation. A related S corporation is an S
corporation that is related to the electing entity (within the meaning
of section 108(i)(5)(A)) and that issues a debt instrument in a debt-
for-debt exchange described in section 108(i)(2)(A) or a deemed debt-
for-debt exchange described in Sec. 1.108(i)-3T(a);
(29) Separate interest. A separate interest is a direct interest in
an electing partnership or in a partnership or S corporation that is a
direct or indirect partner of an electing partnership;
(30) S corporation partner. An S corporation partner is an S
corporation that is a direct or indirect partner of an electing
partnership or a related partnership.
(b) Effective/Applicability dates--(1) In general. This section,
Sec. 1.108(i)-2T, and, except as provided in paragraph (b)(2) of this
section, Sec. 1.108(i)-1T apply to reacquisitions of applicable debt
instruments in taxable years ending after December 31, 2008. In
addition, Sec. 1.108(i)-3T applies to debt instruments issued after
December 31, 2008, in connection with reacquisitions of applicable debt
instruments in taxable years ending after December 31, 2008.
(2) Acceleration events--(i) In general. Section 1.108(i)-1T(b)
(acceleration rules) generally applies to acceleration events occurring
on or after August 11, 2010 However, an electing corporation or C
corporation issuer may apply the acceleration rules to all acceleration
events occurring prior to August 11, 2010 by taking a return position
consistent with these provisions beginning with the first acceleration
event occurring prior to August 11, 2010. Also, in the case of a
consolidated group, if the common parent of the consolidated group
applies the acceleration rules on behalf of one member of the
consolidated group, then the common parent must apply the acceleration
rules to all acceleration events with respect to all members of the
group. If the electing corporation, common parent (under the preceding
sentence), or C corporation issuer, as the case may be, does not apply
the acceleration rules to all acceleration events occurring prior to
August 11, 2010, then it is, with respect to all deferred items,
subject to the rules of section 108(i)(5)(D)(i).
(3) Transitional rules--(i) Net value acceleration rule and
corrective action to restore net value rule. If an electing corporation
applies the acceleration rules of Sec. 1.108(i)-1T(b) to all
acceleration events occurring prior to August 11, 2010 and the due date
of its tax return (including extensions) for the taxable year of the
mandatory acceleration event occurs prior to August 11, 2010, then for
purposes of the net value acceleration rule described in Sec.
1.108(i)-1T(b)(2)(iii), an electing corporation may restore value by
the fifteenth day of the ninth month following August 11, 2010.
(ii) Elective acceleration. If an electing member cannot timely
file an election under Sec. 1.108(i)-1T(b)(3) to accelerate its
remaining deferred COD income by the due date of the electing member's
tax return (including extensions) which occurs prior to August 11,
2010, then an amended return must be filed with the required
information statement by the fifteenth day of the ninth month following
August 11, 2010.
0
Par. 3. Section 1.108(i)-1T is added to read as follows:
Sec. 1.108(i)-1T Deferred discharge of indebtedness income and
deferred original issue discount deductions of C corporations
(temporary).
(a) Overview. Section 108(i)(1) provides an election for the
deferral of COD income arising in connection with the reacquisition of
an applicable debt instrument. An electing corporation generally
includes deferred COD income ratably over the inclusion period.
Paragraph (b) of this section provides rules for the mandatory
acceleration of an electing corporation's remaining deferred COD
income, the mandatory acceleration of a C corporation issuer's deferred
OID deductions, and for the elective acceleration of an electing
member's (other than the common parent's) remaining deferred COD
income. Paragraph (c) of this section provides examples illustrating
the application of the mandatory and elective acceleration rules.
Paragraph (d) of this section provides rules for the computation of an
electing corporation's earnings and profits. Paragraph (e) of this
section refers to the effective/applicability dates.
(b) Acceleration events--(1) Deferred COD income. Except as
otherwise provided in paragraphs (b)(2) and (3) of this section, and
Sec. 1.108(i)-2T(b)(6) (in the case of a corporate partner), an
electing corporation's deferred COD income is taken into account
ratably over the inclusion period.
(2) Mandatory acceleration events. An electing corporation takes
into account all of its remaining deferred COD income, including its
share of an electing partnership's deferred COD income, immediately
before the occurrence of any one of the events described in this
paragraph (b)(2) (mandatory acceleration events).
(i) Changes in tax status. The electing corporation changes its tax
status. For purposes of the preceding sentence, an electing corporation
is treated as changing its tax status if it becomes one of the
following entities:
(A) A tax-exempt entity as defined in Sec. 1.337(d)-4(c)(2).
(B) An S corporation as defined in section 1361(a)(1).
(C) A qualified subchapter S subsidiary as defined in section
1361(b)(3)(B).
(D) An entity operating on a cooperative basis within the meaning
of section 1381.
(E) A regulated investment company (RIC) as defined in section 851
or a real estate investment trust (REIT) as defined in section 856.
(F) A qualified REIT subsidiary as defined in section 856(i), but
only if the qualified REIT subsidiary was not a
[[Page 49403]]
REIT immediately before it became a qualified REIT subsidiary.
(ii) Cessation of corporate existence--(A) In general. The electing
corporation ceases to exist for Federal income tax purposes.
(B) Exception for section 381(a) transactions--(1) In general. The
electing corporation is not treated as ceasing to exist and is not
required to take into account its remaining deferred COD income solely
because its assets are acquired in a transaction to which section
381(a) applies. In such a case, the acquiring corporation succeeds to
the electing corporation's remaining deferred COD income and becomes
subject to section 108(i) and the regulations thereunder, including all
reporting requirements, as if the acquiring corporation were the
electing corporation. A transaction is not treated as one to which
section 381(a) applies for purposes of this paragraph (b)(2)(ii)(B) in
any one of the following circumstances:
(i) The acquisition of the assets of an electing corporation by an
S corporation, if the acquisition is described in section 1374(d)(8).
(ii) The acquisition of the assets of an electing corporation by a
RIC or REIT, if the acquisition is described in Sec. 1.337(d)-
7(a)(2)(ii).
(iii) The acquisition of the assets of a domestic electing
corporation by a foreign corporation.
(iv) The acquisition of the assets of a foreign electing
corporation by a domestic corporation, if as a result of the
transaction, one or more exchanging shareholders include in income as a
deemed dividend all the earnings and profits amount with respect to
stock in the foreign electing corporation pursuant to Sec. 1.367(b)-
3(b)(3).
(v) The acquisition of the assets of an electing corporation by a
tax-exempt entity as defined in Sec. 1.337(d)-4(c)(2).
(vi) The acquisition of the assets of an electing corporation by an
entity operating on a cooperative basis within the meaning of section
1381.
(2) Special rules for consolidated groups--(i) Liquidations. For
purposes of paragraph (b)(2)(ii)(B) of this section, the acquisition of
assets by distributee members of a consolidated group upon the
liquidation of an electing corporation is not treated as a transaction
to which section 381(a) applies, unless immediately prior to the
liquidation, one of the distributee members owns stock in the electing
corporation meeting the requirements of section 1504(a)(2) (without
regard to Sec. 1.1502-34). See Sec. 1.1502-80(g).
(ii) Taxable years. In the case of an intercompany transaction to
which section 381(a) applies, the transaction does not cause the
transferor or distributor to have a short taxable year for purposes of
determining the taxable year of the deferral and inclusion period.
(iii) Net value acceleration rule--(A) In general. The electing
corporation engages in an impairment transaction and, immediately after
the transaction, the gross value of the electing corporation's assets
(gross asset value) is less than one hundred and ten percent of the sum
of its total liabilities and the tax on the net amount of its deferred
items (the net value floor) (the net value acceleration rule).
Impairment transactions are any transactions, however effected, that
impair an electing corporation's ability to pay the amount of Federal
income tax liability on its deferred COD income and include, for
example, distributions (including section 381(a) transactions),
redemptions, below-market sales, charitable contributions, and the
incurrence of additional indebtedness without a corresponding increase
in asset value. Value-for-value sales or exchanges (for example, an
exchange to which section 351 or section 721 applies), or mere declines
in the market value of the electing corporation's assets are not
impairment transactions. In addition, an electing corporation's
investments and expenditures in pursuance of its good faith business
judgment are not impairment transactions. For purposes of determining
an electing corporation's gross asset value, the amount of any
distribution that is not treated as an impairment transaction under
paragraph (b)(2)(iii)(D) of this section (distribution consistent with
historical practice) or under paragraph (b)(2)(iii)(E) of this section
(special rules for RICs and REITs) is treated as an asset of the
electing corporation. Solely for purposes of computing the amount of
the net value floor, the tax on the deferred items is determined by
applying the highest rate of tax specified in section 11(b) for the
taxable year.
(B) Transactions integrated. Any transaction that occurs before the
reacquisition of an applicable debt instrument, but that occurs
pursuant to the same plan as the reacquisition, is taken into account
in determining whether the gross asset value of the electing
corporation is less than the net value floor.
(C) Corrective action to restore net value. An electing corporation
is not required to take into account its deferred COD income under the
net value acceleration rule of paragraph (b)(2)(iii)(A) of this section
if, before the due date of the electing corporation's return (including
extensions), value is restored in a transaction in an amount equal to
the lesser of--
(1) The amount of value that was removed from the electing
corporation in one or more impairment transactions (net of amounts
previously restored under this paragraph (b)(2)(iii)(C)); or
(2) The amount by which the electing corporation's net value floor
exceeds its gross asset value. For purposes of this paragraph
(b)(2)(iii)(C), for example, assume an electing corporation incurs $50
of debt, distributes the $50 of proceeds to its shareholder, and
immediately after the distribution, the electing corporation's gross
asset value is below the net value floor by $25. The electing
corporation may avoid the inclusion of its remaining deferred COD
income if value of at least $25 is restored to it before the due date
of the electing corporation's tax return (including extensions) for the
taxable year that includes the distribution. The value that must be
restored is determined at the time of the impairment transaction on a
net value basis (for example, additional borrowings by an electing
corporation do not restore value).
(D) Exceptions for distributions and charitable contributions that
are consistent with historical practice. An electing corporation's
distributions are not treated as impairment transactions (and are not
taken into account as a reduction of the electing corporation's gross
asset value when applying the net value acceleration rule to any
impairment transaction), to the extent that the distributions are
described in section 301(c) and the amount of these distributions, in
the aggregate, for the applicable taxable year (applicable distribution
amount) does not exceed the annual average amount of section 301(c)
distributions over the preceding three taxable years (average
distribution amount). If an electing corporation's applicable
distribution amount exceeds its average distribution amount (excess
amount), then the amount of the impairment transaction equals the
excess amount. Appropriate adjustments must be made to take into
account any issuances or redemptions of stock, or similar transactions,
occurring during the year of distribution or any of the three preceding
years. If the electing corporation has a short taxable year for the
year of the distribution or for any of the three preceding years, the
amounts are determined on an annualized basis. If an electing
corporation has been in existence for less than three years, the period
during which the electing corporation has been in existence is
[[Page 49404]]
substituted for the three preceding taxable years. For purposes of
determining an electing corporation's average distribution amount, the
electing corporation does not take into account the distribution
history of a distributor or transferor in a transaction to which
section 381(a) applies (other than a transaction described in section
368(a)(1)(F)). Rules similar to those prescribed in this paragraph
(b)(2)(iii)(D) also apply to an electing corporation's charitable
contributions (within the meaning of section 170(c)) that are
consistent with its historical practice.
(E) Special rules for RICs and REITs--(1) Distributions.
Notwithstanding paragraph (b)(2)(iii)(D) of this section, in the case
of a RIC or REIT, any distribution with respect to stock that is
treated as a dividend under section 852 or 857 is not treated as an
impairment transaction (and is not taken into account as a reduction in
gross asset value when applying the net value acceleration rule to any
impairment transaction).
(2) Redemptions by RICs. Any redemption of a redeemable security,
as defined in 15 U.S.C. section 80a-2(a)(32), by a RIC in the ordinary
course of business is not treated as an impairment transaction (and is
not taken into account as a reduction in gross asset value when
applying the net value acceleration rule to any impairment
transaction).
(F) Special rules for consolidated groups--(1) Impairment
transactions and net value acceleration rule. In the case of an
electing member, the determination of whether the member has engaged in
an impairment transaction is made on a group-wide basis. An electing
member is treated as engaging in an impairment transaction if any
member's transaction impairs the group's ability to pay the tax
liability associated with all electing members' deferred COD income.
Accordingly, intercompany transactions are not impairment transactions.
Similarly, the net value acceleration rule is applied by reference to
the gross asset value of all members (excluding stock of members
whether or not described in section 1504(a)(4)), the liabilities of all
members, and the tax on all members' deferred items. For example,
assume P is the common parent of the P-S consolidated group, S has a
section 108(i) election in effect, and S makes a $100 distribution to P
which, on a separate entity basis, would reduce S's gross asset value
below the net value floor. S's intercompany distribution to P is not an
impairment transaction. However, if P makes a $100 distribution to its
shareholder, P's distribution is an impairment transaction (unless the
distribution is consistent with its historical practice under paragraph
(b)(2)(iii)(D) of this section), and the net value acceleration rule is
applied by reference to the assets, liabilities, and deferred items of
the P-S group.
(2) Departing member. If an electing member that previously engaged
in one or more impairment transactions on a separate entity basis
ceases to be a member of a consolidated group (departing member), the
cessation is treated as an impairment transaction and the net value
acceleration rule under paragraph (b)(2)(iii)(A) of this section is
applied to the departing member on a separate entity basis immediately
after ceasing to be a member (and taking into account the impairment
transaction(s) that occurred on a separate entity basis). If the
departing member's gross asset value is below the net value floor, the
departing member's remaining deferred COD income is taken into account
immediately before the departing member ceases to be a member (unless
value is restored under paragraph (b)(2)(iii)(C) of this section). If
the departing member's deferred COD income is not accelerated, the
departing member is subject to the reporting requirements of section
108(i) on a separate entity basis. If the departing member becomes a
member of another consolidated group, the cessation is treated as an
impairment transaction and the net value acceleration rule under
paragraph (b)(2)(iii)(A) of this section is applied by reference to the
assets, liabilities, and the tax on deferred items of the members of
the acquiring group immediately after the transaction. If the acquiring
group's gross asset value is below the net value floor, the departing
member's remaining deferred COD income is taken into account
immediately before the departing member ceases to be a member (unless
value is restored under paragraph (b)(2)(iii)(C) of this section). If
the departing member's remaining deferred COD income is not
accelerated, the common parent of the acquiring group succeeds to the
reporting requirements of section 108(i) with respect to the departing
member.
(3) Elective acceleration for certain consolidated group members--
(i) In general. An electing member (other than the common parent) of a
consolidated group may elect at any time to accelerate in full (and not
in part) the inclusion of its remaining deferred COD income with
respect to all applicable debt instruments by filing a statement
described in paragraph (b)(3)(ii) of this section. Once made, an
election to accelerate deferred COD income under this paragraph (b)(3)
is irrevocable.
(ii) Time and manner for making election--(A) In general. The
election to accelerate the inclusion of an electing member's remaining
deferred COD income with respect to all applicable debt instruments is
made on a statement attached to a timely filed tax return (including
extensions) for the year in which the deferred COD income is taken into
account. The election is made by the common parent on behalf of the
electing member. See Sec. 1.1502-77(a).
(B) Additional information. The statement must include--
(1) Label. A label entitled ``SECTION 1.108(i)-1T ELECTION AND
INFORMATION STATEMENT BY [INSERT NAME AND EMPLOYER IDENTIFICATION
NUMBER OF THE ELECTING MEMBER]''; and
(2) Required information. An identification of each applicable debt
instrument to which an election under this paragraph (b)(3) applies and
the corresponding amount of--
(i) Deferred COD income that is accelerated under this paragraph
(b)(3); and
(ii) Deferred OID deductions that are accelerated under paragraph
(b)(4) of this section.
(4) Deferred OID deductions--(i) In general. Except as otherwise
provided in paragraph (b)(4)(ii) of this section and Sec. 1.108(i)-
2T(b)(6) (in the case of a C corporation partner), a C corporation
issuer's deferred OID deductions are taken into account ratably over
the inclusion period.
(ii) OID acceleration events. A C corporation issuer takes into
account all of its remaining deferred OID deductions with respect to a
debt instrument immediately before the occurrence of any one of the
events described in this paragraph (b)(4)(ii).
(A) Inclusion of deferred COD income. An electing entity or its
owners take into account all of the remaining deferred COD income to
which the C corporation issuer's deferred OID deductions relate. If,
under Sec. 1.108(i)-2T(b) or (c), an electing entity or its owners
take into account only a portion of the deferred COD income to which
the deferred OID deductions relate, then the C corporation issuer takes
into account a proportionate amount of the remaining deferred OID
deductions.
(B) Changes in tax status. The C corporation issuer changes its tax
status within the meaning of paragraph (b)(2)(i) of this section.
(C) Cessation of corporate existence--(1) In general. The C
corporation issuer
[[Page 49405]]
ceases to exist for Federal income tax purposes.
(2) Exception for section 381(a) transactions--(i) In general. A C
corporation issuer is not treated as ceasing to exist and does not take
into account its remaining deferred OID deductions in a transaction to
which section 381(a) applies, taking into account the application of
Sec. 1.1502-34, as appropriate. See Sec. 1.1502-80(g). This exception
does not apply to a transaction which is not treated as one to which
section 381(a) applies under paragraph (b)(2)(iii)(B)(1) of this
section.
(ii) Taxable years. In the case of an intercompany transaction to
which section 381(a) applies, the transaction does not cause the
transferor or distributor to have a short taxable year for purposes of
determining the taxable year of the deferral and inclusion period.
(c) Examples. The application of this section is illustrated by the
following examples. Unless otherwise stated, P, S, S1, and X are
domestic C corporations, and each files a separate return on a calendar
year basis:
Example 1. Net value acceleration rule. (i) Facts. On January 1,
2009, S reacquires its own note and realizes $400 of COD income.
Pursuant to an election under section 108(i), S defers recognition
of the entire $400 of COD income. Therefore, absent a mandatory
acceleration event, S will take into account $80 of its deferred COD
income in each year of the inclusion period. On December 31, 2010, S
makes a $25 distribution to its sole shareholder, P, and this is the
only distribution made by S in the past four years. Immediately
following the distribution, S's gross asset value is $100, S has no
liabilities, and the Federal income tax on S's $400 of deferred COD
income is $140. Accordingly, S's net value floor is $154 (110% x
$140).
(ii) Analysis. Under paragraph (b)(2)(iii)(A) of this section,
S's distribution is an impairment transaction. Immediately following
the distribution, S's gross asset value of $100 is less than the net
value floor of $154. Accordingly, under the net value acceleration
rule of paragraph (b)(2)(iii)(A) of this section, S takes into
account its $400 of deferred COD income immediately before the
distribution.
(iii) Corrective action to restore value. The facts are the same
as in paragraph (i) of this Example 1, except that P contributes
assets with a value of $25 to S before the due date of S's 2010
return (including extensions). Because P restores $25 of value to S
(the lesser of the amount of value removed in the distribution ($25)
or the amount by which S's net value floor exceeds its gross asset
value ($54)), under paragraph (b)(2)(iii)(C) of this section, S does
not take into account its $400 of deferred COD income.
Example 2. Distributions consistent with historical practice.
(i) Facts. P, a publicly traded corporation, makes a valid section
108(i) election with respect to COD income realized in 2009. On
December 31, 2009, P distributes $25 million on its 5 million shares
of common stock outstanding. As of January 1, 2006, P has 10 million
shares of common stock outstanding, and on March 31, 2006, P
distributes $10 million on those 10 million shares. On September 15,
2006, P effects a 2:1 reverse stock split, and on December 31, 2006,
P distributes $10 million on its 5 million shares of common stock
outstanding. In each of 2007 and 2008, P distributes $5 million on
its 5 million shares of common stock outstanding. All of the
distributions are described in section 301(c).
(ii) Amount of impairment transaction. Under paragraph
(b)(2)(iii)(D) of this section, P's 2009 distributions are not
treated as impairment transactions (and are not taken into account
as a reduction of P's gross asset value when applying the net value
acceleration rule to any impairment transaction), to the extent that
the aggregate amount distributed in 2009 (the applicable
distribution amount) does not exceed the annual average amount of
distributions (the average distribution amount) over the preceding
three taxable years. Accordingly, P's applicable distribution amount
for 2009 is $25 million, and its average distribution amount is $10
million ($20 million (2006) plus $5 million (2007) plus $5 million
(2008) divided by 3). The reverse stock split in 2006 is not a
transaction requiring an adjustment to the determination of the
average distribution amount. Because P's applicable distribution
amount of $25 million exceeds its average distribution amount of $10
million, under paragraph (b)(2)(iii)(D) of this section, the amount
of P's 2009 distribution that is treated as an impairment
transaction is $15 million. The balance of the 2009 distribution,
$10 million, is not treated as an impairment transaction (and is not
taken into account as a reduction in P's gross asset value when
applying the net value acceleration rule to any impairment
transaction).
(iii) Distribution history. The facts are the same as in
paragraph (i) of this Example 2, except that in 2010, P merges into
X in a transaction to which section 381(a) applies, with X
succeeding to P's deferred COD income, and X makes a distribution to
its shareholders. For purposes of determining whether X's
distribution is consistent with its historical practice, the average
distribution amount is determined solely with respect to X's
distribution history.
Example 3. Cessation of corporate existence. (i) Transaction to
which section 381(a) applies. P owns all of the stock of S. In 2009,
S reacquires its own note and elects to defer recognition of its
$400 of COD income under section 108(i). On December 31, 2010, S
liquidates into P in a transaction that qualifies under section 332.
Under paragraph (b)(2) of this section, S must take into account all
of its remaining deferred COD income upon the occurrence of any one
of the mandatory acceleration events. Although S ceases its
corporate existence as a result of the liquidation, S is not
required to take into account its remaining deferred COD income
under the exception in paragraph (b)(2)(ii)(B) of this section
because its assets are acquired in a transaction to which section
381(a) applies. However, under paragraph (b)(2)(iii)(A) of this
section, S's distribution to P is an impairment transaction and the
net value acceleration rule is applied with respect to the assets,
liabilities, and deferred items of P (S's successor) immediately
following the distribution. If S's deferred COD income is not taken
into account under the net value acceleration rule of (b)(2)(iii) of
this section, P succeeds to S's remaining deferred COD income and to
S's reporting requirements as if P were the electing corporation.
(ii) Debt-laden distributee. The facts are the same as in
paragraph (i) of this Example 3, except that in the liquidation, S
distributes $100 of assets to P, a holding company whose only asset
is its stock in S. Assume that immediately following the
distribution, P's gross asset value is $100, P has $60 of
liabilities, and the Federal income tax on the $400 of deferred COD
income is $140. Under paragraph (b)(2) of this section, S must take
into account all of its remaining deferred COD income upon the
occurrence of any one of the mandatory acceleration events. Although
S ceases its corporate existence as a result of the liquidation, S
is not required to take into account its remaining deferred COD
income under the exception in paragraph (b)(2)(ii)(B) of this
section because its assets are acquired in a transaction to which
section 381(a) applies. However, under paragraph (b)(2)(iii)(A) of
this section, S's distribution to X is an impairment transaction and
the net value acceleration rule is applied with respect to the
assets, liabilities, and deferred items of P (S's successor).
Immediately following the distribution, P's gross asset value of
$100 is less than the net value floor of $220 [110% x ($60 + $140)].
Accordingly, under the net value acceleration rule of paragraph
(b)(2)(iii)(A) of this section, S is required to take into account
its $400 of deferred COD income immediately before the distribution,
unless value is restored to P pursuant to (b)(2)(iii)(C) of this
section.
(iii) Foreign acquirer. The facts are the same as in paragraph
(i) of this Example 3, except that P is a foreign corporation.
Although S's assets are acquired in a transaction to which section
381(a) applies, under paragraph (b)(2)(ii)(B)(1)(iii) of this
section, the exception to accelerated inclusion does not apply and S
takes into account its remaining deferred COD income immediately
before the liquidation. See also section 367(e)(2) and the
regulations thereunder.
(iv) Section 338 transaction. P, the common parent of a
consolidated group (P group), owns all the stock of S1, one of the
members of the P group. In 2009, S1 reacquires its own indebtedness
and realizes $30 of COD income. Pursuant to an election under
section 108(i), S1 defers recognition of the entire $30 of COD
income. In 2010, P sells all the stock of S1 to X, an unrelated
corporation, for $300, and P and X make a timely section 338(h)(10)
election with respect to the sale. Under paragraph (b)(2)(ii)(A) of
this section, an electing corporation takes into account its
remaining deferred COD income when it ceases its existence for
Federal income tax purposes
[[Page 49406]]
unless the exception in paragraph (b)(2)(ii)(B) of this section
applies. Pursuant to section 338(h)(10) and the regulations, S1 is
treated as transferring all of its assets to an unrelated person in
exchange for consideration that includes the discharge of its
liabilities. This deemed value-for-value exchange is not an
impairment transaction. Following the deemed sale, while S1 is still
a member of the P group, S1 is treated as distributing all of its
assets to P and as ceasing its existence. Under these facts, the
distribution of all of S1's assets constitutes a deemed liquidation,
and is a transaction to which sections 332 and 381(a) apply.
Although S1 ceases its corporate existence as a result of the
liquidation, S1 is not required to take into account its remaining
deferred COD income under the exception in paragraph (b)(2)(ii)(B)
of this section because its assets are acquired in a transaction to
which section 381(a) applies. P succeeds to S1's remaining deferred
COD income and to S1's reporting requirements as if P were the
electing corporation. Under paragraph (b)(2)(iii)(F)(1) of this
section, the intercompany distribution from S1 to P is not an
impairment transaction.
(d) Earnings and profits--(1) In general. Deferred COD income
increases earnings and profits in the taxable year that it is realized
and not in the taxable year or years that the deferred COD income is
includible in gross income. Deferred OID deductions decrease earnings
and profits in the taxable year or years in which the deduction would
be allowed without regard to section 108(i).
(2) Exceptions--(i) RICs and REITs. Notwithstanding paragraph
(d)(1) of this section, deferred COD income increases earnings and
profits of a RIC or REIT in the taxable year or years in which the
deferred COD income is includible in gross income and not in the year
that the deferred COD income is realized. Deferred OID deductions
decrease earnings and profits of a RIC or REIT in the taxable year or
years that the deferred OID deductions are deductible.
(ii) Alternative minimum tax. For purposes of calculating
alternative minimum taxable income, any items of deferred COD income or
deferred OID deduction increase or decrease, respectively, adjusted
current earnings under section 56(g)(4) in the taxable year or years
that the item is includible or deductible.
(e) Effective/applicability dates. For effective/applicability
dates, see Sec. 1.108(i)-0T(b).
(f) Expiration date. This section expires August 9, 2013.
0
Par. 4. Section 1.108(i)-3T is added to read as follows:
Sec. 1.108(i)-3T Rules for the deduction of OID (temporary).
(a) Deemed debt-for-debt exchanges--(1) In general. For purposes of
section 108(i)(2) (relating to deferred OID deductions that arise in
certain debt-for-debt exchanges involving the reacquisition of an
applicable debt instrument), if the proceeds of any debt instrument are
used directly or indirectly by the issuer or a person related to the
issuer (within the meaning of section 108(i)(5)(A)) to reacquire an
applicable debt instrument, the debt instrument shall be treated as
issued for the applicable debt instrument being reacquired. Therefore,
section 108(i)(2) may apply, for example, to a debt instrument issued
by a corporation for cash in which some or all of the proceeds are used
directly or indirectly by the corporation's related subsidiary in the
reacquisition of the subsidiary's applicable debt instrument.
(2) Directly or indirectly. Whether the proceeds of an issuance of
a debt instrument are used directly or indirectly to reacquire an
applicable debt instrument depends upon all of the facts and
circumstances surrounding the issuance and the reacquisition. The
proceeds of an issuance of a debt instrument will be treated as being
used indirectly to reacquire an applicable debt instrument if--
(i) At the time of the issuance of the debt instrument, the issuer
of the debt instrument anticipated that an applicable debt instrument
of the issuer or a person related to the issuer would be reacquired by
the issuer, and the debt instrument would not have been issued if the
issuer had not so anticipated such reacquisition;
(ii) At the time of the issuance of the debt instrument, the issuer
of the debt instrument or a person related to the issuer anticipated
that an applicable debt instrument would be reacquired by a related
person and the related person receives cash or property that it would
not have received unless the reacquisition had been so anticipated; or
(iii) At the time of the reacquisition, the issuer or a person
related to the issuer foresaw or reasonably should have foreseen that
the issuer or a person related to the issuer would be required to issue
a debt instrument, which it would not have otherwise been required to
issue if the reacquisition had not occurred, in order to meet its
future economic needs.
(b) Proportional rule for accruals of OID. For purposes of section
108(i)(2), if only a portion of the proceeds from the issuance of a
debt instrument are used directly or indirectly to reacquire an
applicable debt instrument, the rules of section 108(i)(2)(A) will
apply to the portion of OID on the debt instrument that is equal to the
portion of the proceeds from such instrument used to reacquire the
outstanding applicable debt instrument. Except as provided in the last
sentence of section 108(i)(2)(A), the amount of deferred OID deduction
that is subject to section 108(i)(2)(A) for a taxable year is equal to
the product of the amount of OID that accrues in the taxable year under
section 1272 or section 1275 (and the regulations under those
sections), whichever section is applicable, and a fraction, the
numerator of which is the portion of the total proceeds from the
issuance of the debt instrument used directly or indirectly to
reacquire the applicable debt instrument and the denominator of which
is the total proceeds from the issuance of the debt instrument.
(c) No acceleration--(1) Retirement. Retirement of a debt
instrument subject to section 108(i)(2) does not accelerate deferred
OID deductions.
(2) Cross-reference. See Sec. 1.108(i)-1T and Sec. 1.108(i)-2T
for rules relating to the acceleration of deferred OID deductions.
(d) Examples. The application of this section is illustrated by the
following examples. Unless otherwise stated, all taxpayers in the
following examples are calendar-year taxpayers, and P and S each file
separate returns:
Example 1. (i) Facts. P, a domestic corporation, owns all of the
stock of S, a domestic corporation. S has a debt instrument
outstanding that has an adjusted issue price of $100,000. On January
1, 2010, P issues for $160,000 a four-year debt instrument that has
an issue price of $160,000 and a stated redemption price at maturity
of $200,000, resulting in $40,000 of OID. In P's discussion with
potential lenders/holders, and as described in offering materials
provided to potential lenders/holders, P disclosed that it planned
to use all or a portion of the proceeds from the issuance of the
debt instrument to reacquire outstanding debt of P and its
affiliates. Following the issuance, P makes a $70,000 capital
contribution to S. S then reacquires its debt instrument from X, a
person not related to S within the meaning of section 108(i)(5)(A),
for $70,000. At the time of the reacquisition, the adjusted issue
price of S's debt instrument is $100,000. Under Sec. 1.61-12(c), S
realizes $30,000 of COD income. S makes a section 108(i) election
for the $30,000 of COD income.
(ii) Analysis. Under the facts, at the time of P's issuance of
its $160,000 debt instrument, P anticipated that the loan proceeds
would be used to reacquire the debt of S, and P's debt instrument
would not have been issued for an amount greater than $90,000 if P
had not anticipated that S would use the proceeds to reacquire its
debt. Pursuant to paragraph (a) of this section, the proceeds from
P's issuance of its debt instrument are treated as being used
indirectly to reacquire S's applicable debt instrument. Therefore,
section 108(i)(2)(B) applies to P's debt instrument and P's OID
[[Page 49407]]
deductions on its debt instrument are subject to deferral under
section 108(i)(2)(A). However, because only a portion of the
proceeds from P's debt instrument are used by S to reacquire its
applicable debt instrument, only a portion of P's total OID
deductions will be deferred under section 108(i)(2)(A). See section
108(i)(2)(B). Accordingly, a maximum of $17,500 ($40,000 x $70,000/
$160,000) of P's $40,000 total OID deductions is subject to deferral
under section 108(i)(2)(A). Under paragraph (b) of this section, the
amount of P's deferred OID deduction each taxable year under section
108(i)(2)(A) is equal to the product of the amount of OID that
accrues in the taxable year under section 1272 for the debt
instrument and a fraction ($70,000/$160,000). As a result, P's
deferred OID deductions are the following amounts: $4,015.99 for
2010 ($ 9,179.40 x $70,000/$160,000); $4,246.39 for 2011 ($9,706.04
x $70,000/$160,000); $4,490.01 for 2012 ($10,262.88 x $70,000/
$160,000); and $4,747.61 for 2013 ($10,851.68 x $70,000/$160,000).
Example 2. (i) Facts. The facts are the same as in Example 1,
except that S makes a section 108(i) election for only $10,000 of
the $30,000 of COD income.
(ii) Analysis. The maximum amount of P's deferred OID deductions
under section 108(i)(2)(A) is $10,000 rather than $17,500 because S
made a section 108(i) election for only $10,000 of the $30,000 of
COD income. Under section 108(i)(2)(A), because the amount of OID
that accrues prior to 2014 attributable to the portion of the debt
instrument issued to indirectly reacquire S's applicable debt
instrument under paragraph (b) of this section ($17,500) exceeds the
amount of deferred COD income under section 108(i) ($10,000), P's
deferred OID deductions are the following amounts: $4,015.99 for
2010; $4,246.39 for 2011; $1,737.62 for 2012; and $0 for 2013.
Example 3. (i) Facts. The facts are the same as in Example 1,
except that P pays $200,000 in cash to the lenders/holders on
December 31, 2012, to retire the debt instrument. P did not directly
or indirectly obtain the funds to retire the debt instrument from
the issuance of another debt instrument with OID.
(ii) Analysis. Under paragraph (c)(1) of this section, the
retirement of P's debt instrument is not an acceleration event for
the deferred OID deductions of $4,015.99 for 2010, $4,246.39 for
2011, and $4,490.01 for 2012. Except as provided in Sec. 1.108(i)-
1T(b)(4), these amounts will be taken into account during the
inclusion period. P, however, paid a repurchase premium of
$10,851.68 in 2012 ($200,000 minus the adjusted issue price of
$189,148.32) to retire the debt instrument. If otherwise allowable,
P may deduct this amount in 2012 under Sec. 1.163-7(c).
(e) Effective/applicability dates. For effective/applicability
dates, see Sec. 1.108(i)-0T(b).
(f) Expiration date. This section expires August 9, 2013.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 5.The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 6. In Sec. 602.101, paragraph (b) is amended by adding the
following entry in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.108(i)-1T............................................. 1545-2147
* * * * *
------------------------------------------------------------------------
* * * * *
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: August 6, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-20060 Filed 8-11-10; 11:15 am]
BILLING CODE 4830-01-P