[Federal Register Volume 69, Number 91 (Tuesday, May 11, 2004)]
[Rules and Regulations]
[Pages 26038-26040]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10571]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9127]
RIN 1545-BC47


Reduction of Tax Attributes Due to Discharge of Indebtedness

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations regarding the 
reduction of tax attributes under sections 108 and 1017 of the Internal 
Revenue Code. These final regulations affect taxpayers that realize 
income from the discharge of indebtedness that is excluded from gross 
income pursuant to section 108.

DATES: Effective Date: These final regulations are effective May 10, 
2004.
    Applicability Date: These final regulations apply to discharges of 
indebtedness occurring on or after May 10, 2004.

FOR FURTHER INFORMATION CONTACT: Theresa M. Kolish (202-622-7530) of 
the Office of Associate Chief Counsel (Corporate) (not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    On July 18, 2003, the IRS and Treasury Department promulgated 
temporary regulations providing guidance regarding the application of 
the attribute reduction rules of sections 108 and 1017. Those temporary 
regulations clarified that, in the case of a transaction described in 
section 381(a) that ends a year in which the distributor or transferor 
corporation excludes income from the discharge of indebtedness from 
gross income under section 108(a)(excluded COD income), any tax 
attributes to which the acquiring corporation succeeds, including the 
basis of property acquired by the acquiring corporation in the 
transaction, must reflect the reductions required by

[[Page 26039]]

sections 108 and 1017. For this purpose, all attributes listed in 
section 108(b)(2) of the distributor or transferor corporation 
immediately prior to the transaction described in section 381(a), 
including the basis of property, but after the determination of tax for 
the year of the discharge, are available for reduction under section 
108(b)(2).
    The temporary regulations were published in the Federal Register 
(68 FR 42590) for July 18, 2003, and a notice of proposed rulemaking 
(Reg-113112-03) cross-referencing the temporary regulations was 
published in the Federal Register for the same day (68 FR 42652). No 
public hearing was requested or held. One written comment was received. 
The following paragraphs describe the written comment received and the 
changes made to the temporary regulations in these final regulations.
    The comment received argued that the rules of the temporary 
regulations are contrary to the relevant provisions of the Internal 
Revenue Code. The IRS and Treasury Department continue to believe that 
the rules of sections 108(b)(4)(A) and 1017 merely prescribe an 
ordering of calculations and that the rules of the temporary 
regulations are consistent with the policies underlying sections 108 
and 1017 and the corporate reorganization provisions, including 
``deferring, but eventually collecting within a reasonable period, tax 
on ordinary income realized from debt discharge.'' S. Rep. No. 96-1035, 
at 10 (1980).
    The IRS and Treasury Department, however, have become aware that 
taxpayers are taking the position that the rules of the temporary 
regulations do not apply in certain cases to reduce the attributes to 
which the acquiring corporation succeeded as a result of certain 
transactions described in section 381(a). Therefore, these final 
regulations make certain modifications to the rules of the temporary 
regulations to ensure that, to the extent possible, the transferor 
corporation's excluded COD income is applied to reduce attributes in a 
manner that will effect a deferral, rather than a permanent 
elimination, of income. In that regard, the final regulations apply in 
cases in which the taxpayer realizes excluded COD income either during 
or after the taxable year in which the taxpayer is the distributor or 
transferor of assets in a transaction described in section 381(a). In 
addition, it provides that the basis of stock or securities of the 
acquiring corporation received by the taxpayer in exchange for the 
transferred assets in the transaction described in section 381(a) is 
not available for reduction under section 108(b)(2).

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. It also has 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 
these 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, the notice of proposed 
rulemaking preceding these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these regulations is Theresa M. Kolish, 
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.

Final Amendments to the Regulations

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

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entry for ``1.108-7T'' and continues to read, in part, as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.108-7T is redesignated as Sec.  1.108-7 and amended 
as follows:
0
1. The language ``(temporary)'' is removed from the section heading.
0
2. Paragraphs (c) and (e) are revised.
    The revisions read as follows:


Sec.  1.108-7  Reduction of attributes.

* * * * *
    (c) Transactions to which section 381 applies. If a taxpayer 
realizes COD income that is excluded from gross income under section 
108(a) either during or after a taxable year in which the taxpayer is 
the distributor or transferor of assets in a transaction described in 
section 381(a), any tax attributes to which the acquiring corporation 
succeeds, including the basis of property acquired by the acquiring 
corporation in the transaction, must reflect the reductions required by 
section 108(b). For this purpose, all attributes listed in section 
108(b)(2) immediately prior to the transaction described in section 
381(a), but after the determination of tax for the year of the 
distribution or transfer of assets, including basis of property, will 
be available for reduction under section 108(b)(2). However, the basis 
of stock or securities of the acquiring corporation, if any, received 
by the taxpayer in exchange for the transferred assets shall not be 
available for reduction under section 108(b)(2).
* * * * *
    (e) Effective date. This section applies to discharges of 
indebtedness occurring on or after May 10, 2004.

0
Par. 3. Section 1.1017-1 is amended by revising paragraph (b)(4) to 
read as follows:


Sec.  1.1017-1  Basis reductions following a discharge of indebtedness.

* * * * *
    (b) * * *
    (4) Transactions to which section 381 applies. If a taxpayer 
realizes COD income that is excluded from gross income under section 
108(a) either during or after a taxable year in which the taxpayer is 
the distributor or transferor of assets in a transaction described in 
section 381(a), the basis of property acquired by the acquiring 
corporation in the transaction must reflect the reductions required by 
section 1017 and this section. For this purpose, the basis of property 
of the distributor or transferor corporation immediately prior to the 
transaction described in section 381(a), but after the determination of 
tax for the year of the distribution or transfer of assets, will be 
available for reduction under section 108(b)(2). However, the basis of 
stock or securities of the acquiring corporation, if any, received by 
the taxpayer in exchange for the transferred assets shall not be 
available for reduction under section 108(b)(2). See Sec.  1.108-7. 
This paragraph (b)(4) applies to discharges of indebtedness occurring 
on or after May 10, 2004.

0
Par. 4. In Sec.  1.1017-1T, paragraph (b)(4) is removed and the entry 
for paragraphs (a) through (b)(3) is revised to read as follows:

[[Page 26040]]

Sec.  1.1017-1T  Basis reductions following a discharge of indebtedness 
(temporary).

    (a) through (b)(4) [Reserved]. For further guidance, see Sec.  
1.1017-1(a) through (b)(4).
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: May 4, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-10571 Filed 5-10-04; 8:45 am]
BILLING CODE 4830-01-P