II Calendar No. 11 111th CONGRESS 1st Session S. 33 IN THE SENATE OF THE UNITED STATES January 6, 2009 Mr. Ensign introduced the following bill; which was read the first time January 7, 2009 Read the second time and placed on the calendar A BILL To amend the Internal Revenue Code of 1986 with respect to the proper tax treatment of certain indebtedness discharged in 2009 or 2010, and for other purposes.

1.

Proper tax treatment of certain financial indebtedness discharged in 2009 or 2010

(a)

In general

Section 108(a)(1) of the Internal Revenue Code of 1986 (relating to exclusion from gross income) is amended by striking or at the end of subparagraph (D), by striking the period at the end of subparagraph (E) and inserting , or and by adding at the end the following new subparagraph: (F)the indebtedness discharged is applicable financial indebtedness which is discharged after December 31, 2008, and before January 1, 2011. . (b)

Applicable financial indebtedness

Section 108 of such Code is amended by adding at the end the following new subsection: (i)

Definitions and rules relating to applicable financial indebtedness

For purposes of subsection (a)(1)(F)— (1)

Applicable financial indebtedness

The term applicable financial indebtedness means indebtedness— (A)which was originally issued by a corporation, or by a partnership engaged in a trade or business (other than a trade or business of trading in stocks or securities for the partnership’s own account), and (B)which is— (i)indebtedness originally issued or syndicated by a financial institution (as defined in section 582(c)(2) without regard to subparagraph (C) thereof) or a depository institution holding company (as defined in section 3(w)(1) of the Federal Deposit Insurance Act (12 U.S.C. 1813(w)(1)), (ii)indebtedness which— (I)constitutes a security within the meaning of the Securities Act of 1933, and (II)was originally issued pursuant to a registration statement that was declared effective under such Act or pursuant to an exemption from, or in a transaction not subject to, the registration requirements of such Act, or (iii)indebtedness that is traded on an established market (within the meaning of section 1273(b)(3)). (2)

Applicable discharges

Subsection (a)(1)(F) shall only apply to a discharge of applicable financial indebtedness if such discharge is by reason of— (A)the acquisition of the indebtedness by the issuer of the indebtedness, (B)the acquisition of the indebtedness of the issuer by a person related, or who becomes related, to the issuer of the indebtedness from a person who is not related to the issuer, or (C)the significant modification of the indebtedness (within the meaning of section 1001). For purposes of subparagraph (B), the determination of whether a person is related to another person shall be made in the same manner as under subsection (e)(4).. (c)

Coordination of exclusions

Section 108(a)(2) of such Code is amended— (1)by striking and (E) in subparagraph (A) and inserting (E), and (F), and (2)by adding at the end the following new subparagraph: (D)

Financial indebtedness exclusion takes precedence over insolvency exclusion unless elected otherwise

Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(F) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(F). . (d)

Earnings and profits

Section 312(l) of such Code is amended by adding at the end the following new paragraph: (3)

Discharge of certain financial indebtedness

The earnings and profits of a corporation shall not include income from a discharge of indebtedness to which section 108(a)(1)(F) applies. . (e)

Other special rules

(1)

Treatment as market discount bond

For purposes of the Internal Revenue Code of 1986, any indebtedness acquired in a transaction described in section 108(i)(2)(B) of such Code (as added by subsection (b)), or received pursuant to an exchange arising from a transaction described in section 108(i)(2)(C) of such Code (as so added), shall be treated as a market discount bond (within the meaning of section 1278(a)(1) of such Code) having market discount equal to the amount (if any) which, but for section 108(a)(1)(F) of such Code (as added by subsection (a)), would have been includible in gross income by reason of the discharge of such indebtedness in any such transaction. (2)

Acquisitions by foreign persons

Any interest (or original issue discount) paid or accrued after December 31, 2008, and before January 1, 2011, on indebtedness which is described in section 108(a)(1)(F) of such Code by reason of the acquisition of such indebtedness by a foreign person or by a partnership (or other pass-through entity) in which a foreign person is a partner (or other profits or capital owner) shall not be subject to sections 871(h)(3), 881(c)(3)(B) or 881(c)(3)(C) of such Code.

January 7, 2009 Read the second time and placed on the calendar