[Federal Register Volume 73, Number 152 (Wednesday, August 6, 2008)]
[Proposed Rules]
[Pages 45656-45660]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-17952]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-102822-08]
RIN 1545-BH54


Section 108 Reduction of Tax Attributes for S Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that provide 
guidance on the manner in which an S corporation reduces its tax 
attributes under section 108(b) for taxable years in which the S 
corporation has discharge of indebtedness income that is excluded from 
gross income under section 108(a). In particular, the regulations 
address situations in which the aggregate amount of the shareholders' 
disallowed section 1366(d) losses and deductions that are treated as a 
net operating loss tax attribute of the S corporation exceeds the 
amount of the S corporation's excluded discharge of indebtedness 
income. The proposed regulations will affect S corporations and their 
shareholders. This document also provides notice of a public hearing on 
these proposed regulations.

DATES: Written and electronic comments must be received by November 4, 
2008. Outlines of topics to be discussed at the public hearing 
scheduled for December 8, 2008, must be received by November 4, 2008.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-102822-08), Room 5203, 
Internal Revenue Service, PO 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-
102822-08), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov/ (IRS REG-102822-08). The 
public hearing will be held in the IRS Auditorium, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC.

[[Page 45657]]


FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Jennifer N. Keeney, (202) 622-3060; concerning submissions of comments, 
the hearing, or to be placed on the building access list to attend the 
hearing, Funmi Taylor, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by November 4, 2008. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in these proposed regulations is in 
Sec.  1.108-7(d)(4). This information must be provided by both the S 
corporations that exclude discharge of indebtedness income from gross 
income under section 108(a) and the shareholders of those S 
corporations. The information will be used by the S corporation to 
properly reduce its tax attributes under section 108(b), and the 
information will be used by the shareholders of S corporations to 
calculate their taxable income in succeeding taxable years. The 
respondents will be S corporations and their shareholders.
    Estimated total annual reporting burden: 1,000 hours.
    Estimated average annual burden hours per respondent: 1 hour.
    Estimated number of respondents: 1,000.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    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. Generally, tax returns and 
return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 108 of the Internal Revenue Code (Code). Section 61(a) provides 
that gross income means all income from whatever source derived, 
including (but not limited to) income from discharge of indebtedness, 
also known as cancellation of debt (COD income). Section 108(a) 
provides an exclusion from gross income for COD income if the discharge 
occurs while the taxpayer is bankrupt or insolvent, or if the 
indebtedness discharged is qualified farm indebtedness, certain 
qualified real property business indebtedness, or certain qualified 
principal residence indebtedness. In the case of a discharge of 
indebtedness during insolvency, the exclusion from income is limited to 
the amount by which the taxpayer is insolvent. Section 108(b) provides 
that the taxpayer must reduce certain specified tax attributes to the 
extent COD income is excluded under section 108(a)(1)(A), (B), or (C). 
Section 108(b) also provides the order in which these tax attributes 
must be reduced. Unless the taxpayer makes an election under section 
108(b)(5) to first reduce the basis of depreciable property, section 
108(b)(2)(A) provides that the first tax attribute to be reduced is any 
net operating loss for the taxable year of the discharge, and any net 
operating loss carryover to such taxable year.

Explanation of Provisions

A. Allocation of Excess Losses and Deductions After Section 108(b) Tax 
Attribute Reduction

    Section 108 provides special rules for an S corporation that has 
COD income. Section 108(d)(7)(A), as amended by the Job Creation and 
Worker Assistance Act of 2002, Public Law 107-147, provides, in part, 
that the rules under section 108(a) for the exclusion of COD income and 
under section 108(b) for the reduction of tax attributes are applied at 
the corporate level, including by not taking into account under section 
1366(a) any amount excluded under section 108(a). Therefore, if an S 
corporation excludes COD income from its gross income under section 
108(a), the amount excluded is applied to reduce the S corporation's 
tax attributes under section 108(b)(2). Under section 108(b)(4)(A), the 
reduction of tax attributes occurs after the S corporation's items of 
income, loss, deduction and credit for the taxable year of the 
discharge pass through to its shareholders under section 1366(a). Under 
section 1366(d)(1), the aggregate amount of losses and deductions a 
shareholder can take into account under section 1366(a) cannot exceed 
the shareholder's adjusted basis in the shareholder's stock in the S 
corporation and the shareholder's adjusted basis of any indebtedness of 
the S corporation to the shareholder. For purposes of the tax attribute 
reduction rule under section 108(b)(2), any loss or deduction that is 
disallowed for the taxable year of the discharge under section 
1366(d)(1) is treated as a net operating loss of the S corporation 
under section 108(d)(7)(B) (deemed NOL). The proposed regulations 
clarify that the S corporation's deemed NOL includes all losses and 
deductions disallowed under section 1366(d)(1) for the taxable year of 
the discharge, including disallowed losses and deductions of a 
shareholder that had transferred all of the shareholder's stock in the 
S corporation during such year.
    If the amount of the S corporation's deemed NOL exceeds the amount 
of excluded COD income, the proposed regulations provide that the S 
corporation's excess deemed NOL is allocated to the shareholder or 
shareholders of the S corporation as losses and deductions disallowed 
under section 1366(d)(1) for the taxable year of the discharge. If an S 
corporation has more than one shareholder during the taxable year of 
the discharge, the proposed regulations provide a rule for determining 
the amount of excess deemed NOL allocated to each shareholder. The 
allocation rule in the proposed regulations takes into account the 
amount of each shareholder's disallowed losses or deductions under 
section 1366(d)(1) (before the tax attribute reduction under section 
108(b)(2)) and the amount of excluded

[[Page 45658]]

COD income that would have been taken into account by each shareholder 
under section 1366(a) had the COD income not been excluded under 
section 108(a). This allocation method alleviates, within the 
parameters of section 108(d)(7)(B), the disparate treatment that could 
occur where the shareholders' respective disallowed losses or 
deductions under section 1366(d)(1) that are treated as the S 
corporation's deemed NOL are disproportionate to the shareholders' 
respective ownership interests. The IRS and the Treasury Department 
recognize that shareholders may be disproportionately impacted where 
the shareholders' respective disallowed losses or deductions are 
disproportionate to their respective ownership interests. The IRS and 
the Treasury Department request comments on alternative mechanisms that 
could address such disproportionate economic effects and on the 
collateral consequences of such mechanisms.
    The proposed regulations also provide that any amount of the S 
corporation's excess deemed NOL that is allocated under this allocation 
method to a shareholder that had transferred all of the shareholder's 
stock in the S corporation during the year of the discharge is treated 
as a disallowed loss or deduction that is permanently disallowed under 
Sec.  1.1366-2(a)(5) of the Income Tax Regulations, unless the transfer 
is described in section 1041(a).

B. Character of Excess Deemed NOL Allocated to a Shareholder

    A shareholder's losses or deductions disallowed under section 
1366(d)(1) consist of a pro rata share of the total losses and 
deductions allocated to the shareholder under section 1366(a) during 
the corporation's taxable year (including losses and deductions 
disallowed under section 1366(d)(1) for prior years that are treated as 
current year losses and deductions with respect to the shareholder 
under section 1366(d)(2)). The character of any item included in a 
shareholder's pro rata share under section 1366(a) is determined as if 
such item were realized directly from the source from which it was 
realized by the S corporation, or incurred in the same manner as 
incurred by the corporation. The items of income, loss, or deduction 
that pass through to a shareholder, and that comprise a shareholder's 
suspended loss or deduction under section 1366(d)(1), retain their 
character (for example, ordinary deduction, long-term capital loss).
    Section 108(d)(7)(B) does not address potential character 
differences that may exist in a shareholder's disallowed losses or 
deductions under section 1366(d)(1) that are included in the S 
corporation's deemed NOL. Under the general rules of section 108(b)(2), 
a taxpayer's net operating loss is reduced before any other tax 
attributes, such as capital loss carryovers. Therefore, to be 
consistent with the ordering rule in section 108(b)(2), the proposed 
regulations provide that in determining the character of the amount of 
the S corporation's excess deemed NOL that is allocated to a 
shareholder, any ordinary loss or deduction that was disallowed under 
section 1366(d)(1) and that was included in the S corporation's deemed 
NOL is treated as reduced before any capital loss that was disallowed 
under section 1366(d)(1) and that was included in the S corporation's 
deemed NOL. With respect to section 1231 losses, where it is uncertain 
whether the loss ultimately will be characterized as ordinary or 
capital, the proposed regulations provide that any section 1231 loss or 
deduction that was disallowed under section 1366(d)(1) and that was 
included in the S corporation's deemed NOL is treated as reduced after 
any ordinary loss and before any capital loss.

C. Information Sharing Requirements

    An S corporation shareholder determines the amount of any suspended 
loss or deduction under section 1366(d)(1) for a taxable year. If the 
shareholder has a suspended loss or deduction under section 1366(d)(1), 
the shareholder maintains a record of the carryover loss or deduction 
amount. Because any suspended loss or deduction under section 
1366(d)(1) is treated as a net operating loss of the S corporation for 
purposes of the tax attribute reduction rule under section 108(b)(2), 
the S corporation will need to know the amount of each shareholder's 
suspended loss or deduction under section 1366(d)(1). The proposed 
regulations require shareholders of an S corporation that excludes COD 
income from its gross income in a taxable year to provide this 
information to the S corporation. In addition, because each shareholder 
will need to know the amount of the shareholder's disallowed losses or 
deductions remaining after the tax attribute reduction, the proposed 
regulations require the S corporation to provide to its shareholders 
the amount of any excess deemed NOL that is allocated to a shareholder 
after the tax attribute reduction, even if such amount is zero. The IRS 
and the Treasury Department request comments on whether the information 
sharing requirements in the proposed regulations are necessary or 
overly burdensome and on whether special rules are needed if 
shareholders fail to provide the required information to the S 
corporation.

Proposed Effective Date

    These regulations are proposed to apply to discharges of 
indebtedness occurring on or after the date these regulations are 
published as final regulations in the Federal Register.

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 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. It is hereby 
certified that the collection of information contained in these 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that the collection burden imposed on S corporations and their 
shareholders is minimal in that it requires S corporations and their 
shareholder(s) to share information that shareholders already maintain 
to determine their respective tax liability. Moreover, it should take 
an S corporation or a shareholder no more than one hour to satisfy the 
information sharing requirements in these regulations. Finally, the 
collection burden imposed applies only to S corporations that are 
required to reduce their tax attributes under section 108(b) of the 
Code--a group estimated to be less than 1 percent of all existing S 
corporations. Therefore, a regulatory flexibility analysis under the 
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. 
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 Public Hearing

    Before these 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 the 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.

[[Page 45659]]

    A public hearing has been scheduled for December 8, 2008, beginning 
at 10 a.m. in the auditorium of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the Internal Revenue Building lobby more than 30 minutes before 
the hearing starts. For information about having your name placed on 
the building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by November 4, 2008 and submit an outline of the 
topics to be discussed and the time to be devoted to each topic (signed 
original and eight (8) copies) by November 4, 2008. A period of 10 
minutes will be allotted to each person for making comments. An agenda 
showing the schedule of speakers will be prepared after the deadline 
for receiving outlines has passed. Copies of the agenda will be 
available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Jennifer N. Keeney, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and the Treasury 
Department participated in their 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 1.108-7 is amended by:
    1. Redesignating paragraphs (d) and (e) as paragraphs (e) and (f), 
respectively.
    2. Adding new paragraph (d).
    3. Adding paragraph (e) Example 5 and Example 6 to newly-
redesignated paragraph (e).
    4. Revising newly-redesignated paragraph (f).
    The additions and revision read as follows:


Sec.  1.108-7  Reduction of attributes.

* * * * *
    (d) Special rules for S corporations--(1) In general. If an S 
corporation excludes COD income from gross income under section 
108(a)(1)(A), (B), or (C), the amount excluded shall be applied to 
reduce the S corporation's tax attributes under paragraph (a)(1) of 
this section. For purposes of paragraph (a)(1)(i) of this section, the 
aggregate amount of the shareholders' losses or deductions that are 
disallowed for the taxable year of the discharge under section 
1366(d)(1), including disallowed losses or deductions of a shareholder 
that transfers all of the shareholder's stock in the S corporation 
during the taxable year of the discharge, is treated as the net 
operating loss tax attribute (deemed NOL) of the S corporation for the 
taxable year of the discharge.
    (2) Allocation of excess losses or deductions--(i) In general. If 
the amount of an S corporation's deemed NOL exceeds the amount of the S 
corporation's COD income that is excluded from gross income under 
section 108(a)(1)(A), (B), or (C), the excess deemed NOL shall be 
allocated to the shareholder or shareholders of the S corporation as a 
loss or deduction that is disallowed under section 1366(d) for the 
taxable year of the discharge.
    (ii) Multiple shareholders--(A) In general. If an S corporation has 
multiple shareholders, to determine the amount of the S corporation's 
excess deemed NOL to be allocated to each shareholder under paragraph 
(d)(2)(i) of this section, calculate with respect to each shareholder 
the shareholder's excess amount. The shareholder's excess amount is the 
amount (if any) by which the shareholder's losses or deductions 
disallowed under section 1366(d)(1) (before any reduction under 
paragraph (a)(1) of this section) exceed the amount of COD income that 
would have been taken into account by that shareholder under section 
1366(a) had the COD income not been excluded under section 108(a).
    (B) Shareholders with a shareholder's excess amount. Each 
shareholder that has a shareholder's excess amount, as determined under 
paragraph (d)(2)(ii)(A) of this section, is allocated an amount equal 
to the S corporation's excess deemed NOL multiplied by a fraction, the 
numerator of which is the shareholder's excess amount and the 
denominator of which is the sum of all shareholders' excess amounts.
    (C) Shareholders with no shareholder's excess amount. If a 
shareholder does not have a shareholder's excess amount as determined 
in paragraph (d)(2)(ii)(A) of this section, none of the S corporation's 
excess deemed NOL shall be allocated to that shareholder.
    (iii) Terminating shareholder. Any amount of the S corporation's 
excess deemed NOL allocated under paragraph (d)(2) of this section to a 
shareholder that had transferred all of the shareholder's stock in the 
corporation during the taxable year of the discharge is permanently 
disallowed under Sec.  1.1366-2(a)(5), unless the transfer of stock is 
described in section 1041(a). If the transfer of stock is described in 
section 1041(a), the amount of the S corporation's excess deemed NOL 
allocated to the transferor under paragraph (d)(2) of this section 
shall be treated as a loss or deduction incurred by the corporation in 
the succeeding taxable year with respect to the transferee. See section 
1366(d)(2)(B).
    (3) Character of excess losses or deductions allocated to a 
shareholder. In determining the character of the amount of the S 
corporation's excess deemed NOL allocated to a shareholder under 
paragraph (d)(2) of this section, any ordinary loss or deduction that 
was included in the shareholder's aggregate amount of disallowed losses 
or deductions under section 1366(d)(1) is treated as reduced under 
section 108(b) before any section 1231 loss that was included in the 
shareholder's aggregate amount of disallowed losses or deductions under 
section 1366(d)(1), and any section 1231 loss is treated as reduced 
under section 108(b) before any capital loss that was included in the 
shareholder's aggregate amount of disallowed losses or deductions under 
section 1366(d)(1).
    (4) Information requirements. If an S corporation excludes COD 
income from gross income under section 108(a) for a taxable year, each 
shareholder of the S corporation during the taxable year of the 
discharge must provide to the S corporation the amount of the 
shareholder's losses and deductions that are disallowed for the taxable 
year of the discharge under section 1366(d)(1). The S corporation must 
provide to each shareholder the amount of any of the S corporation's 
excess deemed NOL that is allocated to that shareholder under paragraph 
(d)(2) of this section, even if that amount is zero.
    (e) * * *

    Example 5. (i) Facts. During the entire calendar year 2008, A, 
B, and C each own equal shares of stock in X, a calendar year S 
corporation. As of December 31, 2008, A, B,

[[Page 45660]]

and C each have a zero stock basis and X does not have any 
indebtedness to A, B, or C. For the 2008 taxable year, X excludes 
from gross income $30,000 of COD income under section 108(a)(1)(A). 
The COD income (had it not been excluded) would have been allocated 
$10,000 to A, $10,000 to B, and $10,000 to C under section 1366(a). 
For the 2008 taxable year, X has $30,000 of losses and deductions 
that X passes through pro-rata to A, B, and C in the amount of 
$10,000 each. The losses and deductions that pass through to A, B, 
and C are disallowed under section 1366(d)(1). In addition, B has 
$10,000 of section 1366(d) losses from prior years and C has $20,000 
from prior years. A's ($10,000), B's ($20,000) and C's ($30,000) 
combined $60,000 of disallowed losses and deductions for the taxable 
year of the discharge are treated as a current year net operating 
loss tax attribute for X under section 108(d)(7)(B) (deemed NOL) for 
purposes of the section 108(b) reduction of tax attributes.
    (ii) Allocation. Under section 108(b)(2)(A), X's $30,000 of 
excluded COD income reduces this $60,000 deemed NOL to $30,000. 
Therefore, X has a $30,000 excess net operating loss (excess deemed 
NOL) to allocate to the shareholders. Under paragraph (d)(2)(ii)(C) 
of this section, none of the $30,000 excess deemed NOL is allocated 
to A because A's section 1366(d) losses and deductions immediately 
prior to the section 108(b)(2)(A) reduction ($10,000) do not exceed 
A's share of the excluded COD income for 2008 ($10,000). Thus, A has 
no shareholder's excess amount. Each of B's and C's respective 
section 1366(d) losses and deductions immediately prior to the 
section 108(b)(2)(A) reduction exceed each of B's and C's respective 
shares of the excluded COD income for 2008. B's excess amount is 
$10,000 ($20,000 - $10,000) and C's excess amount is $20,000 
($30,000 - $10,000). Therefore, the total of all shareholders' 
excess amounts is $30,000. Under paragraph (d)(2) of this section, X 
will allocate $10,000 of the $30,000 excess deemed NOL to B ($30,000 
x $10,000/$30,000) and $20,000 of the $30,000 excess deemed NOL to C 
($30,000 x $20,000/$30,000). These amounts are treated as losses and 
deductions disallowed under section 1366(d)(1) for the taxable year 
of the discharge. Accordingly, at the beginning of 2009, A has no 
section 1366(d)(2) carryovers, B has $10,000 of carryovers, and C 
has $20,000 of carryovers.
    (iii) Character. Immediately prior to the section 108(b)(2)(A) 
reduction, B's $20,000 of section 1366(d) losses and deductions 
consisted of $8,000 of long-term capital losses, $7,000 of section 
1231 losses, and $5,000 of ordinary losses. After the section 
108(b)(2)(A) tax attribute reduction, X will allocate $10,000 of the 
excess deemed NOL to B. Under paragraph (d)(3) of this section, the 
$5,000 of ordinary losses are treated as reduced first, followed by 
$5,000 of section 1231 losses. Accordingly, the $10,000 of losses 
allocated to B consist of the remaining $2,000 of section 1231 
losses and $8,000 of long-term capital losses. As a result, at the 
beginning of 2009, B's $10,000 of section 1366(d)(2) carryovers 
include $2,000 of section 1231 losses and $8,000 of long-term 
capital losses.
    Example 6. (i) A and B each own 50 percent of the shares of 
stock in X, a calendar year S corporation. On June 30, 2008, A sells 
all of her shares of stock in X to C in a transfer not described in 
section 1041(a). For the 2008 taxable year, X excludes from gross 
income $12,000 of COD income under section 108(a)(1)(A). The COD 
income (had it not been excluded) would have been allocated $3,000 
to A, $6,000 to B, and $3,000 to C under section 1366(a). Prior to 
the section 108(b)(2)(A) reduction, for the taxable year of the 
discharge the shareholders have disallowed losses and deductions 
under section 1366(d) (including disallowed losses carried over to 
the current year under section 1366(d)(2)) in the following amounts: 
A--$9,000, B--$9,000, and C--$2,000. These combined $20,000 of 
disallowed losses and deductions for the taxable year of the 
discharge are treated as a current year net operating loss tax 
attribute for X under section 108(d)(7)(B) (deemed NOL).
    (ii) Under section 108(b)(2)(A), X's $12,000 of excluded COD 
income reduces the $20,000 deemed NOL to $8,000. Therefore, X has an 
$8,000 excess net operating loss (excess deemed NOL) to allocate to 
the shareholders. Under paragraph (d)(2)(ii)(C) of this section, 
none of the $8,000 excess deemed NOL is allocated to C because C's 
section 1366(d) losses and deductions immediately prior to the 
section 108(b)(2)(A) reduction ($2,000) do not exceed C's share of 
the excluded COD income for 2008 ($3,000). However, each of A's and 
B's respective section 1366(d) losses and deductions immediately 
prior to the section 108(b)(2)(A) reduction exceed each of A's and 
B's respective shares of the excluded COD income for 2008. A's 
excess amount is $6,000 ($9,000-$3,000) and B's excess amount is 
$3,000 ($9,000-$6,000). Therefore, the total of all shareholders' 
excess amounts is $9,000. Under paragraph (d)(2) of this section, X 
will allocate $5,333 of the $8,000 excess deemed NOL to A ($8,000 x 
$6,000/$9,000) and $2,667 of the $8,000 excess deemed NOL to B 
($8,000 x $3,000/$9,000). However, because A transferred all of her 
shares of stock in X in a transaction not described in section 
1041(a), A's $5,333 of section 1366(d) losses and deductions are 
permanently disallowed under paragraph (d)(2)(iii) of this section. 
Accordingly, at the beginning of 2009, B has $2,667 of section 
1366(d)(2) carryovers and C has no section 1366(d)(2) carryovers.

    (f) Effective/applicability date--(1) Paragraphs (a), (b), (c), and 
Examples 1, 2, 3, and 4 of paragraph (e) of this section apply to 
discharges of indebtedness occurring on or after May 10, 2004.
    (2) Paragraph (d) and Examples 5 and 6 of paragraph (e) of this 
section apply to discharges of indebtedness occurring on or after the 
date that these regulations are published as final regulations in the 
Federal Register.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E8-17952 Filed 8-5-08; 8:45 am]
BILLING CODE 4830-01-P