[Federal Register Volume 68, Number 238 (Thursday, December 11, 2003)]
[Rules and Regulations]
[Pages 69024-69025]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30636]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9098]
RIN 1545-BC77


Guidance Under Section 1502; Application of Section 108 to 
Members of a Consolidated Group

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains amendments to temporary regulations 
under section 1502 that govern the application of section 108 when a 
member of a consolidated group realizes discharge of indebtedness 
income. These temporary regulations affect corporations filing 
consolidated returns. The text of the 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.

DATES: Effective Date: These regulations are effective December 10, 
2003.

FOR FURTHER INFORMATION CONTACT: Amber Renee Cook or Marie C. Milnes-
Vasquez at (202) 622-7530 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 61(a)(12) of the Internal Revenue Code (Code) provides that 
gross income includes income from the discharge of indebtedness, except 
as provided by law. Section 108(a) provides that, in certain cases, 
gross income of a C corporation does not include certain amounts of 
discharge of indebtedness income that would otherwise be includible in 
gross income. In these cases, however, the taxpayer must reduce its tax 
attributes, including the basis of property, by the excluded amount of 
discharge of indebtedness income (excluded COD income). This provision 
reflects Congressional intent of ``deferring, but eventually collecting 
within a reasonable period, tax on ordinary income realized from debt 
discharge.'' See H.R. Rep. 96-833 at 9 (1980); S. Rep. No. 96-1035 at 
10 (1980).
    On September 4, 2003, the IRS and Treasury Department published in 
the Federal Register a notice of proposed rulemaking (REG-132760-03, 68 
FR 52542) and temporary regulations (TD 9089, 68 FR 52487) under 
section 1502 (the original regulations). The original regulations 
provide guidance regarding the determination of the attributes that are 
available for reduction when a member of a consolidated group realizes 
excluded COD income and the method for reducing those attributes. As 
explained in the preamble to the original regulations, those 
regulations adopt a consolidated approach that is intended to reduce 
all attributes that are available to the debtor member and contain a 
rule governing the order in which attributes are reduced. In 
particular, under the original regulations, the attributes attributable 
to the debtor member are first subject to reduction. For this purpose, 
attributes attributable to the debtor member include (1) consolidated 
attributes attributable to the debtor member, (2) attributes that arose 
in separate return limitation years of the debtor member, and (3) the 
basis of property of the debtor member. To the extent that the excluded 
COD income exceeds the attributes attributable to the debtor member, 
the original regulations require the reduction of consolidated 
attributes attributable to other members and attributes attributable to 
other members that arose (or are treated as arising) in a separate 
return limitation year to the extent that the debtor member is a member 
of the separate return limitation year subgroup with respect to such 
attribute.

Explanation of Provisions

    The IRS and Treasury Department have become aware that the original 
regulations may not provide for the reduction of all the attributes 
that are in fact available to the debtor member. In particular, those 
regulations may not require the reduction of tax attributes 
attributable to members other than the debtor member that arise in a 
separate return year and that are not subject to a SRLY limitation. 
Such attributes, for example, include attributes from separate return 
limitation years that are not subject to a SRLY limitation as a result 
of the application of the overlap rule of Sec.  1.1502-15(g) or Sec.  
1.1502-21(g).
    These temporary regulations, therefore, amend the original 
regulations to include among the tax attributes that are subject to 
reduction, after the reduction of the tax attributes attributable to 
the debtor member, tax attributes attributable to members other than 
the debtor member (other than asset basis) that arose in a separate 
return year or that arose (or are treated as arising) in a separate 
return limitation year to the extent that no SRLY limitation applies to 
the use of such attributes by the group. This amendment is consistent 
with the approach of the original regulations to make available for 
reduction all of the attributes that are available to offset income of 
the debtor member.

Effective Date

    These amendments to the original regulations generally apply to 
discharges of indebtedness that occur after August 29, 2003, but only 
if the discharge occurs during a taxable year the original return for 
which is due (without regard to extensions) after December 10, 2003.

Other Issues

    The IRS and Treasury Department are aware that there are a number 
of other technical issues that have been identified regarding the 
operation of the original regulations. The IRS and Treasury Department 
are currently studying these issues, including the application of 
section 1245 to property the basis of which has been reduced, the 
timing of certain basis adjustments, and the timing of taking into 
account certain excess loss accounts. It is expected that guidance 
regarding these issues will be issued in the near future and may 
available on a retroactive basis.

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. These temporary 
regulations are necessary to provide taxpayers with immediate guidance 
regarding the application of section 108 when a member of a 
consolidated group realizes discharge of indebtedness income that is 
excluded from gross income and the application of previously 
promulgated regulations regarding such application. Accordingly, good 
cause is found for dispensing with notice and public procedure pursuant 
to 5 U.S.C.

[[Page 69025]]

553(b)(B) and with a delayed effective date pursuant to 5 U.S.C. 
553(d)(3). For applicability of the Regulatory Flexibility Act, please 
refer to the cross-reference notice of proposed rulemaking published 
elsewhere in this issue of the Federal Register. Pursuant to section 
7805(f) of the Code, these temporary regulations will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Marie C. Milnes-
Vasquez of the Office of Associate Chief Counsel (Corporate). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
1. The authority citation for part 1 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1502-28T also issued under 26 U.S.C. 1502. * * *


0
2. Section 1.1502-28T is amended by revising paragraphs (a)(4) and (d) 
to read as follows:


Sec.  1.1502-28T  Consolidated section 108 (temporary).

    (a) * * *
    (4) Reduction of certain tax attributes attributable to other 
members. To the extent that, pursuant to paragraph (a)(2) of this 
section, the excluded COD income is not applied to reduce the tax 
attributes attributable to the member that realizes the excluded COD 
income, after the application of paragraph (a)(3) of this section, such 
amount shall be applied to reduce the remaining consolidated tax 
attributes of the group as provided in section 108 and this section. 
Such amount also shall be applied to reduce the tax attributes 
attributable to members that arose (or are treated as arising) in a 
separate return limitation year to the extent that the member that 
realizes excluded COD income is a member of the separate return 
limitation year subgroup with respect to such attribute if a SRLY 
limitation applies to the use of such attribute. In addition, such 
amount shall be applied to reduce the tax attributes attributable to 
members that arose in a separate return year or that arose (or are 
treated as arising) in a separate return limitation year if no SRLY 
limitation applies to the use of such attribute. The reduction of each 
tax attribute pursuant to the three preceding sentences shall be made 
in the order prescribed in section 108 and pursuant to the principles 
of Sec.  1.1502-21T(b)(1). Except as otherwise provided in this 
paragraph (a)(4), a tax attribute that arose in a separate return year 
or that arose (or is treated as arising) in a separate return 
limitation year is not subject to reduction pursuant to this paragraph 
(a)(4). Basis in assets is not subject to reduction pursuant to this 
paragraph (a)(4). Finally, to the extent that the realization of 
excluded COD income by a member pursuant to paragraph (a)(3) does not 
reduce a tax attribute attributable to such lower-tier member, such 
excess shall not be applied to reduce tax attributes attributable to 
any member pursuant to this paragraph (a)(4).
* * * * *
    (d) Effective dates. This section other than paragraph (a)(4) of 
this section applies to discharges of indebtedness that occur after 
August 29, 2003. Paragraph (a)(4) of this section applies to discharges 
of indebtedness that occur after August 29, 2003, but only if the 
discharge occurs during a taxable year the original return for which is 
due (without regard to extensions) after December 10, 2003. However, 
groups may apply paragraph (a)(4) of this section to discharges of 
indebtedness that occur after August 29, 2003, and during a taxable 
year the original return for which is due (without regard to 
extensions) on or before December 10, 2003. For discharges of 
indebtedness that occur after August 29, 2003, and during a taxable 
year the original return for which is due (without regard to 
extensions) on or before December 10, 2003, paragraph (a)(4) of this 
section shall apply as in effect on August 29, 2003.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

    Approved: December 2, 2003.
Gregory Jenner,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03-30636 Filed 12-10-03; 8:45 am]
BILLING CODE 4830-01-P