[Federal Register Volume 76, Number 71 (Wednesday, April 13, 2011)]
[Proposed Rules]
[Pages 20593-20594]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-8758]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-154159-09]
RIN 1545-BJ14
Guidance Under Section 108(a) Concerning the Exclusion of Section
61(a)(12) Discharge of Indebtedness Income of a Grantor Trust or a
Disregarded Entity
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to the
exclusion from gross income under section 108(a) of discharge of
indebtedness income of a grantor trust or an entity that is disregarded
as an entity separate from its owner. The proposed regulations provide
rules regarding the term ``taxpayer'' for purposes of applying section
108 to discharge of indebtedness income of a grantor trust or a
disregarded entity. The proposed regulations affect grantor trusts,
disregarded entities, and their owners.
DATES: Written or electronic comments and requests for a public hearing
must be received by July 12, 2011.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-154159-09), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
154159-09), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC; or sent electronically, via the Federal
eRulemaking Portal at http://www.regulations.gov (IRS REG-154159-09).
FOR FURTHER INFORMATION CONTACT: Bryan A. Rimmke or Benjamin H. Weaver,
(202) 622-3050 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 61(a)(12) of the Internal Revenue Code (the Code) provides
that income from the discharge of indebtedness is includable in gross
income. However, such income may be excludable from gross income under
section 108 in certain circumstances. Section 108(a)(1)(A) and (B)
excludes from gross income any amount that would be includible in gross
income by reason of the discharge of indebtedness of the taxpayer if
the discharge occurs in a Title 11 case or to the extent the taxpayer
is insolvent when the discharge occurs. Section 108(d)(1) through (3)
provides the meaning of the terms ``indebtedness of the taxpayer,''
``Title 11 case,'' and ``insolvent,'' for purposes of applying section
108, and each definition uses the term ``taxpayer.'' Section
7701(a)(14) defines a taxpayer as any person subject to any internal
revenue tax.
Several types of disregarded entities exist under the Code and
regulations. For instance, Sec. 301.7701-2(a) of the Procedure and
Administration Regulations provides that the term business entity
includes an entity with a single owner that may be disregarded as an
entity separate from its owner under Sec. 301.7701-3; an example of a
disregarded entity under this provision is a domestic single member
limited liability company that does not elect to be classified as a
corporation for Federal income tax purposes. Additionally, some
disregarded entities are created by statute; examples of statutory
disregarded entities include a corporation that is a qualified REIT
subsidiary (within the meaning of section 856(i)(2)), and a corporation
that is a qualified subchapter S subsidiary (within the meaning of
section 1361(b)(3)(B)).
The activities of an entity that is a disregarded entity are
treated in the same manner as a sole proprietorship, branch, or
division of the owner (except for certain employment and excise tax
rules). Accordingly, for Federal income tax purposes, all assets,
liabilities, and items of income, deduction, and credit of a
disregarded entity are treated as assets, liabilities, and such items
(as the case may be) of the owner of the disregarded entity.
A grantor trust is any portion of a trust that is treated (under
subpart E of part I of subchapter J of chapter 1) as being owned by the
grantor or another person. In the case of any grantor trust, items of
income, deductions, and credits attributable to the trust are
includable in computing the taxable income and credits of the owner.
Explanation of Provisions
The proposed regulations provide that, for purposes of applying
section 108(a)(1)(A) and (B) to discharge of indebtedness income of a
grantor trust or a disregarded entity, the term taxpayer, as used in
section 108(a)(1) and (d)(1) through (3), refers to the owner(s) of the
grantor trust or disregarded entity. The proposed regulations further
provide that grantor trusts and disregarded entities themselves will
not be considered owners for this purpose. Finally, the proposed
regulations provide that, in the case of a partnership, the owner rules
apply at the partner level to the partners of the partnership to whom
the discharge of indebtedness income is allocable. Thus, for example,
if a partnership holds an interest in a grantor trust or disregarded
entity, the applicability of section 108(a)(1)(A) and (B) to discharge
of indebtedness income of the grantor trust or disregarded entity is
tested by looking to the partners to whom the income is allocable. If
any partner is itself a grantor trust or disregarded entity, the
applicability of section 108(a)(1)(A) and (B) is determined by looking
through such grantor trust or disregarded entity to the ultimate
owner(s) of such partner.
Some taxpayers have taken the position that the insolvency
exception is available to the extent a grantor trust or disregarded
entity is insolvent, even if its owner is not. The IRS and the Treasury
Department do not believe this
[[Page 20594]]
is an appropriate application of the relevant statutory provisions. The
proposed regulations clarify that, subject to the special rule for
partnerships under section 108(d)(6), the insolvency exception is
available only to the extent the owner is insolvent, as owner is
determined as described in this preamble.
Some taxpayers have taken the position that the bankruptcy
exception is available if a grantor trust or disregarded entity is
under the jurisdiction of a bankruptcy court, even if its owner is not.
These taxpayers may argue that because, for Federal income tax
purposes, the disregarded entity is disregarded and the ``taxpayer'' is
the owner of the disregarded entity's assets and liabilities, the
taxpayer is properly seen as being subject to the bankruptcy court's
jurisdiction. Under the proposed regulations, it is insufficient for
the grantor trust or disregarded entity to be subject to the bankruptcy
court's jurisdiction. The proposed regulations clarify that, subject to
the special rule for partnerships under section 108(d)(6), the
bankruptcy exception is available only if the owner of the grantor
trust or disregarded entity is subject to the bankruptcy court's
jurisdiction, as owner is determined as described in this preamble.
Proposed Effective/Applicability Date
These regulations are proposed to apply to discharge of
indebtedness income occurring on or after the date final regulations
are published in the Federal Register. No inference is intended that
the provisions set forth in these proposed regulations are not current
law.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, this regulation has
been submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Comments and Requests for a Public Hearing
Before the proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and eight
(8) copies) or electronic comments that are submitted timely to the
IRS. The IRS and Treasury Department request comments on the clarity of
the proposed rules and how they can be made easier to understand. All
comments will be available for public inspection and copying. A public
hearing may be scheduled if requested in writing by any person that
timely submits written comments. If a public hearing is scheduled,
notice of the date, time, and place for the public hearing will be
published in the Federal Register.
Drafting Information
The principal authors of these regulations are Bryan A. Rimmke and
Benjamin H. Weaver, Office of the Associate Chief Counsel (Passthroughs
& Special Industries). However, other personnel from the IRS and
Treasury Department participated in its development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.108-9 is added to read as follows:
Sec. 1.108-9 Application of insolvency and bankruptcy provisions of
section 108 to disregarded entities and grantor trusts.
(a) General rule. For purposes of applying section 108(a)(1)(A) and
(B) to discharge of indebtedness income of a grantor trust or
disregarded entity, neither the grantor trust nor the disregarded
entity shall be considered to be the ``taxpayer,'' as that term is used
in section 108(a)(1) and (d)(1) through (3). Rather, for purposes of
section 108(a)(1) and (d)(1) through (3) and subject to section
108(d)(6), the owner of the grantor trust or disregarded entity is the
taxpayer. If indebtedness of a grantor trust or disregarded entity is
discharged in a Title 11 case, section 108(a)(1)(A) will apply only to
an owner of the grantor trust or disregarded entity that is under the
jurisdiction of the court in a Title 11 case. If the grantor trust or
disregarded entity is under the jurisdiction of the court in a Title 11
case, but the owner of the grantor trust or disregarded entity is not,
section 108(a)(1)(A) will not apply to the discharge of indebtedness
income. If indebtedness of a grantor trust or disregarded entity is
otherwise discharged, section 108(a)(1)(B) will apply only to the
extent the owner of the grantor trust or disregarded entity is
insolvent. If the grantor trust or disregarded entity is insolvent, but
the owner of the grantor trust or disregarded entity is not, section
108(a)(1)(B) will not apply to the discharge of indebtedness income.
(b) Application to partnerships. Under section 108(d)(6), in the
case of a partnership, section 108(a)(1)(A) and (B) applies at the
partner level. Accordingly, in the case of a partnership, paragraph (a)
of this section applies to the partners of such partnership to whom the
discharge of indebtedness income is allocable.
(c) Definitions--(1) Disregarded entities. For purposes of this
section, a disregarded entity is an entity that is disregarded as an
entity separate from its owner for Federal income tax purposes.
Examples of disregarded entities include a domestic single member
limited liability company that does not elect to be classified as a
corporation for Federal income tax purposes, a corporation that is a
qualified REIT subsidiary (within the meaning of section 856(i)(2)),
and a corporation that is a qualified subchapter S subsidiary (within
the meaning of section 1361(b)(3)(B)).
(2) Grantor trust. For purposes of this section, a grantor trust is
any portion of a trust that is treated under subpart E of part I of
subchapter J of chapter 1 as being owned by the grantor or another
person.
(3) Owner. Notwithstanding any other provision of this section to
the contrary, neither a grantor trust nor a disregarded entity shall be
considered an owner for purposes of this section.
(d) Effective/applicability date. The rules of this section are
proposed to apply to discharge of indebtedness income occurring on or
after the date final regulations are published in the Federal Register.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-8758 Filed 4-12-11; 8:45 am]
BILLING CODE 4830-01-P