[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Rules and Regulations]
[Pages 39984-39992]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15881]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9622]
RIN 1545-BI96
Guidance Regarding Deferred Discharge of Indebtedness Income of
Corporations and Deferred Original Issue Discount Deductions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations under section 108(i)
of the Internal Revenue Code (Code). These regulations primarily affect
C corporations and provide necessary guidance regarding the accelerated
inclusion of deferred discharge of indebtedness (also known as
cancellation of debt (COD)) income (deferred COD income) and the
accelerated deduction of deferred original issue discount (OID)
(deferred OID deductions) under section 108(i)(5)(D) (acceleration
rules), and the calculation of earnings and profits as a result of an
election under section 108(i). In addition, these regulations provide
rules applicable to all taxpayers regarding deferred OID deductions
under section 108(i) as a result of a reacquisition of an applicable
debt instrument by an issuer or related party.
DATES: Effective Date: These regulations are effective on July 2, 2013.
Applicability Dates: For dates of applicability, see Sec.
1.108(i)-0(b).
FOR FURTHER INFORMATION CONTACT: Concerning the acceleration rules for
deferred COD income and deferred OID deductions, and the rules for
earnings and profits, Robert M. Rhyne (202) 622-7790; concerning the
generally applicable rules for deferred OID deductions, William E.
Blanchard (202) 622-3950 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these regulations has
been
[[Page 39985]]
reviewed and approved by the Office of Management and Budget in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507)
under control number 1545-2147. The collection of information in these
final regulations is in Sec. 1.108(i)-1(b)(3). Under Sec. 1.108(i)-
1(b)(3), an electing member (other than the common parent) of a
consolidated group may elect to accelerate the inclusion of its
remaining deferred COD income with respect to all applicable debt
instruments by filing a statement.
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
Section 108(i) was added to the Code by section 1231 of the
American Recovery and Reinvestment Tax Act of 2009 (Pub. L. 111-5, 123
Stat. 338), enacted on February 17, 2009. Section 108(i)(1) provides an
election for deferral of the inclusion of COD income arising in
connection with the reacquisition after December 31, 2008, and before
January 1, 2011, of an applicable debt instrument. If an election is
made, a taxpayer's deferred COD income generally is includible in gross
income ratably over a 5-taxable-year period, beginning with the
taxpayer's fourth or fifth taxable year following the taxable year of
the reacquisition (inclusion period).
Section 108(i)(2) provides that if, as part of a reacquisition to
which section 108(i)(1) applies, a debt instrument is issued (or is
treated as issued) for the applicable debt instrument and there is any
OID with respect to the newly issued debt instrument, then the
deduction for all or a portion of the OID may be deferred. A debt
instrument is treated as issued for an applicable debt instrument if
the proceeds of the debt instrument are used directly or indirectly by
the issuer to reacquire the applicable debt instrument of the issuer.
Section 108(i)(2)(B). In general, the aggregate amount of the deferred
OID deductions is allowed ratably over the inclusion period.
Section 108(i)(5)(D) requires a taxpayer to accelerate the
inclusion or deduction of any remaining items of deferred COD income or
deferred (and otherwise allowable) OID (deferred items) under certain
circumstances, including the death of the taxpayer, the liquidation or
sale of substantially all the assets of the taxpayer (including in a
title 11 or similar case), the cessation of business by the taxpayer,
or similar circumstances. Section 108(i)(7) authorizes the Secretary to
issue guidance necessary or appropriate for purposes of applying
section 108(i), including extending the application of the rules of
section 108(i)(5)(D) to other appropriate circumstances.
On August 17, 2009, the IRS and Treasury Department issued Rev.
Proc. 2009-37, 2009-36 IRB 309, which outlined the procedures for
making a section 108(i) election, and required annual reporting of
additional information regarding the amount of deferred COD income
included in income in the taxable year, the amount of deferred OID
deducted in the taxable year, and the amount of any remaining deferred
items. See Sec. 601.601(d)(2)(ii)(b). On August 13, 2010, the IRS and
Treasury Department published temporary regulations (TD 9497) in the
Federal Register (75 FR 49394) addressing the acceleration rules for C
corporations under section 108(i)(5)(D) and the calculation of a C
corporation's earnings and profits as a result of an election under
section 108(i). In addition, the temporary regulations addressed the
deduction of deferred OID under section 108(i)(2). A notice of proposed
rulemaking (REG-142800-09) cross-referencing the temporary regulations
was published in the Federal Register on the same day (75 FR 49428).
Comments responding to the notice of proposed rulemaking were received
and are available for public inspection at http://www.regulations.gov
or upon request. No public hearing was requested or held. After
consideration of all comments, the proposed regulations are adopted
without substantive change by this Treasury decision, and the
corresponding temporary regulations are removed.
Summary of Comments
A. Acceleration Rules for an Electing Corporation in Bankruptcy
Proceedings
One commenter requested clarification of the acceleration rules
applicable to a C corporation in bankruptcy proceedings. Section
108(i)(5)(D) provides, in relevant part, that in the case of the
liquidation or sale of substantially all of the assets of the taxpayer
(including in a title 11 or similar case), the taxpayer must accelerate
the inclusion or deduction of its remaining deferred items in the
taxable year in which such event occurs (or in the case of a title 11
case, the day before the petition is filed). Section 108(i)(7)(A)
further authorizes the Secretary to prescribe such regulations, rules,
or other guidance as may be necessary or appropriate for purposes of
applying section 108(i), including extending the application of the
rules of section 108(i)(5)(D) to other circumstances, where
appropriate.
The rules provided in the proposed regulations are intended to
focus on the underlying purpose of section 108(i)(5)(D) to ensure that
the government's ability to collect the tax liability associated with
the deferred COD income is not impaired. Consistent with this
interpretation, the proposed regulations provide for accelerated
inclusion of deferred COD income in circumstances in which a C
corporation has impaired its ability to pay the latent tax liability.
Under the proposed regulations, any C corporation with deferred COD
income by reason of a section 108(i) election (an electing corporation)
must accelerate the inclusion of its remaining deferred COD income,
whether in bankruptcy proceedings or not, immediately before the
occurrence of any one of the following events: The electing corporation
(i) changes its tax status, (ii) ceases its corporate existence in a
transaction to which section 381(a) does not apply, or (iii) engages in
a transaction that impairs its ability to pay the tax liability
associated with its deferred COD income (the net value acceleration
rule). The acceleration rules under Sec. 1.108(i)-2 also apply to C
corporations that are direct or indirect partners of an electing
partnership. The proposed regulations do not provide any special
acceleration rules for an electing corporation in a title 11 or similar
case with regard to either (i) acceleration events or (ii) the time of
inclusion of deferred COD income resulting from the occurrence of any
acceleration event. Accordingly, all deferred COD income of any
electing corporation is required to be taken into account by the
electing corporation immediately before the occurrence of any
acceleration event enumerated in the proposed regulations.
The IRS and Treasury Department believe that the acceleration rules
provided in the proposed regulations, including with respect to the
inclusion of deferred COD income immediately before the occurrence of
an enumerated acceleration event, are sufficient to protect the
collectability of tax relating to deferred COD income in the case of
all electing corporations, whether or not in a title 11 or similar
case. Accordingly,
[[Page 39986]]
consistent with the proposed regulations, these final regulations do
not provide special acceleration rules for an electing corporation in
bankruptcy proceedings. However, to remove any doubt, the final
regulations include non-substantive changes to clearly provide that the
acceleration rules contained therein apply with respect to any electing
corporation regardless of whether the electing corporation is in a
title 11 or similar case at the time a mandatory acceleration event
occurs.
B. Guidance on Built-in Items
Commenters made requests for guidance on how the treatment of
built-in items under section 382 interacts with section 108(i). The IRS
and Treasury Department believe that this issue is better addressed in
more general guidance regarding the treatment of built-in items under
section 382. Accordingly, no guidance on this issue is provided in
these final regulations.
C. Adjustments to Earnings and Profits
The proposed regulations provide that deferred COD income generally
increases earnings and profits in the taxable year that it is realized,
and deferred OID deductions generally decrease earnings and profits in
the taxable year or years in which the deductions would be allowed
without regard to the deferral rules of section 108(i). The approach
adopted in the proposed regulations reflects the view that an electing
corporation has recognized economic income in the year of the
discharge, enhancing its dividend paying capacity, and has recognized
an economic cost in the year the OID accrues, decreasing its dividend
paying capacity. Therefore, earnings and profits are appropriately
adjusted. The IRS and Treasury Department also recognized that it was
important to provide general guidance regarding the timing for
adjustments to earnings and profits so that an electing corporation
would understand the consequences of making a section 108(i) election.
A question was raised concerning why the proposed regulations did
not provide a rule similar to section 301(e) in conjunction with the
general rule for earnings and profits. The IRS and Treasury Department
do not believe that such a rule is necessary to achieve the purposes of
section 108(i). In addition, because adjustments to earnings and
profits for the relevant years have already been made in accordance
with the proposed regulations (and Rev. Proc. 2009-37 (2009-36 IRB
309)), the IRS and Treasury Department believe that a change to the
earnings and profits rules in these final regulations would be
burdensome. Accordingly, these final regulations adopt these rules of
the proposed regulations without change.
D. Transitional Rules
The proposed regulations provide that the rules for acceleration of
deferred COD income and deferred OID deductions apply prospectively.
However, electing corporations were given the option to apply these
rules to acceleration events occurring prior to the effective date of
the proposed regulations if applied consistently. Because certain
provisions of the acceleration rules are time sensitive (for example,
the time for restoring value under the net value acceleration rule),
the proposed regulations included transitional rules extending the
period of time in which an electing corporation needed to comply with
the provision's requirements in order to allow electing corporations
the ability to use and benefit from these provisions for prior periods.
These transitional rules are no longer necessary because additional
time is no longer needed to comply with these provisions. Accordingly,
these final regulations amend the proposed regulations by removing
these transitional rules.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13563. 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. It is hereby certified that these final
regulations will not have a significant economic impact on a
substantial number of small entities. This certification is based upon
the fact that these regulations merely provide more specific guidance
for the timing of the inclusion of deferred COD income and the
deduction of deferred original issue discount that is otherwise
includible or deductible under the Code. 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,
the proposed regulations preceding these regulations were submitted to
the Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business. No comments were received.
Drafting Information
The principal author of these regulations is Robert M. Rhyne of the
Office of Associate Chief Counsel (Corporate). Other personnel from the
IRS and Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 and 602 are amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by removing
the entries for Sec. 1.108(i)-0T, Sec. 1.108(i)-1T, and Sec.
1.108(i)-3T, and adding the entries for Sec. 1.108(i)-0, Sec.
1.108(i)-1, and Sec. 1.108(i)-3, to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.108(i)-0 also issued under 26 U.S.C. 108(i)(7) and
1502. * * *
Section 1.108(i)-1 also issued under 26 U.S.C. 108(i)(7) and
1502. * * *
Section 1.108(i)-3 also issued under 26 U.S.C. 108(i)(7) and
1502. * * *
0
Par. 2. Section 1.108(i)-0 is added to read as follows:
Sec. 1.108(i)-0 Definitions and effective/applicability dates.
(a) Definitions. For purposes of regulations under section 108(i)--
(1) Acquisition. An acquisition, with respect to any applicable
debt instrument, includes an acquisition of the debt instrument for
cash or other property, the exchange of the debt instrument for another
debt instrument (including an exchange resulting from a modification of
the debt instrument), the exchange of the debt instrument for corporate
stock or a partnership interest, the contribution of the debt
instrument to capital, the complete forgiveness of the indebtedness by
the holder of the debt instrument, and a direct or an indirect
acquisition within the meaning of Sec. 1.108-2.
(2) Applicable debt instrument. An applicable debt instrument is a
debt instrument that was issued by a C corporation or any other person
in connection with the conduct of a trade or business by such person.
In the case of an intercompany obligation (as defined in Sec. 1.1502-
13(g)(2)(ii)),
[[Page 39987]]
applicable debt instrument includes only an instrument for which COD
income is realized upon the instrument's deemed satisfaction under
Sec. 1.1502-13(g)(5).
(3) C corporation issuer. C corporation issuer means a C
corporation that issues a debt instrument with any deferred OID
deduction.
(4) C corporation partner. A C corporation partner is a C
corporation that is a direct or indirect partner of an electing
partnership or a related partnership.
(5) COD income. COD income means income from the discharge of
indebtedness, as determined under sections 61(a)(12) and 108(a) and the
regulations under those sections.
(6) COD income amount. A COD income amount is a partner's
distributive share of COD income with respect to an applicable debt
instrument of an electing partnership.
(7) Debt instrument. Debt instrument means a bond, debenture, note,
certificate, or any other instrument or contractual arrangement
constituting indebtedness (within the meaning of section 1275(a)(1)).
(8) Deferral period. For a reacquisition that occurs in 2009,
deferral period means the taxable year of the reacquisition and the
four taxable years following such taxable year. For a reacquisition
that occurs in 2010, deferral period means the taxable year of the
reacquisition and the three taxable years following such taxable year.
(9) Deferred amount. A deferred amount is the portion of a
partner's COD income amount with respect to an applicable debt
instrument that is deferred under section 108(i).
(10) Deferred COD income. Deferred COD income means COD income that
is deferred under section 108(i).
(11) Deferred item. A deferred item is any item of deferred COD
income or deferred OID deduction that has not been previously taken
into account under section 108(i).
(12) Deferred OID deduction. A deferred OID deduction means an
otherwise allowable deduction for OID that is deferred under section
108(i)(2) with respect to a debt instrument issued (or treated as
issued under section 108(e)(4)) in a debt-for-debt exchange described
in section 108(i)(2)(A) or a deemed debt-for-debt exchange described in
Sec. 1.108(i)-3(a).
(13) Deferred section 465 amount. A deferred section 465 amount is
described in paragraph (d)(3) of Sec. 1.108(i)-2.
(14) Deferred section 752 amount. A deferred section 752 amount is
described in paragraph (b)(3) of Sec. 1.108(i)-2.
(15) Direct partner. A direct partner is a person that owns a
direct interest in a partnership.
(16) Electing corporation. An electing corporation is a C
corporation with deferred COD income by reason of a section 108(i)
election.
(17) Electing entity. An electing entity is an entity that is a
taxpayer that makes an election under section 108(i).
(18) Electing member. An electing member is an electing corporation
that is a member of an affiliated group that files a consolidated
return.
(19) Electing partnership. An electing partnership is a partnership
that makes an election under section 108(i).
(20) Electing S corporation. An electing S corporation is an S
corporation that makes an election under section 108(i).
(21) Included amount. An included amount is the portion of a
partner's COD income amount with respect to an applicable debt
instrument that is not deferred under section 108(i) and is included in
the partner's distributive share of partnership income for the taxable
year of the partnership in which the reacquisition occurs.
(22) Inclusion period. The inclusion period is the five taxable
years following the last taxable year of the deferral period.
(23) Indirect partner. An indirect partner is a person that owns an
interest in a partnership through an S corporation and/or one or more
partnerships.
(24) Issuing entity. An issuing entity is any entity that is--
(i) A related partnership;
(ii) A related S corporation;
(iii) An electing partnership that issues a debt instrument (or is
treated as issuing a debt instrument under section 108(e)(4)) in a
debt-for-debt exchange described in section 108(i)(2)(A) or a deemed
debt-for-debt exchange described in Sec. 1.108(i)-3(a); or
(iv) An electing S corporation that issues a debt instrument (or is
treated as issuing a debt instrument under section 108(e)(4)) in a
debt-for-debt exchange described in section 108(i)(2)(A) or a deemed
debt-for-debt exchange described in Sec. 1.108(i)-3(a).
(25) OID. OID means original issue discount, as determined under
sections 1271 through 1275 (and the regulations under those sections).
If the amount of OID with respect to a debt instrument is less than a
de minimis amount as determined under Sec. 1.1273-1(d), the OID is
treated as zero for purposes of section 108(i)(2).
(26) Reacquisition. A reacquisition, with respect to any applicable
debt instrument, is any event occurring after December 31, 2008 and
before January 1, 2011, that causes COD income with respect to such
applicable debt instrument, including any acquisition of the debt
instrument by the debtor that issued (or is otherwise the obligor
under) the debt instrument or a person related to such debtor (within
the meaning of section 108(i)(5)(A)).
(27) Related partnership. A related partnership is a partnership
that is related to the electing entity (within the meaning of section
108(i)(5)(A)) and that issues a debt instrument in a debt-for-debt
exchange described in section 108(i)(2)(A) or a deemed debt-for-debt
exchange described in Sec. 1.108(i)-3(a).
(28) Related S corporation. A related S corporation is an S
corporation that is related to the electing entity (within the meaning
of section 108(i)(5)(A)) and that issues a debt instrument in a debt-
for-debt exchange described in section 108(i)(2)(A) or a deemed debt-
for-debt exchange described in Sec. 1.108(i)-3(a).
(29) Separate interest. A separate interest is a direct interest in
an electing partnership or in a partnership or S corporation that is a
direct or indirect partner of an electing partnership.
(30) S corporation partner. An S corporation partner is an S
corporation that is a direct or indirect partner of an electing
partnership or a related partnership.
(b) Effective/Applicability dates--(1) In general. The rules of
this section, Sec. 1.108(i)-1, and Sec. 1.108(i)-2, apply on or after
July 2, 2013 to reacquisitions of applicable debt instruments in
taxable years ending after December 31, 2008. In addition, the rules of
Sec. 1.108(i)-3 apply on or after July 2, 2013 to debt instruments
issued after December 31, 2008, in connection with reacquisitions of
applicable debt instruments in taxable years ending after December 31,
2008.
(2) Prior periods. For rules applying before July 2, 2013 see Sec.
1.108(i)-0T, Sec. 1.108(i)-1T, Sec. 1.108(i)-2T, and Sec. 1.108(i)-
3T, as contained in 26 CFR part 1, revised April 1, 2012.
Sec. 1.108(i)-0T [Removed]
0
Par. 3. Section 1.108(i)-0T is removed.
0
Par. 4. Section 1.108(i)-1 is added to read as follows:
Sec. 1.108(i)-1 Deferred discharge of indebtedness income and
deferred original issue discount deductions of C corporations.
(a) Overview. Section 108(i)(1) provides an election for the
deferral of COD income arising in connection with the reacquisition of
an applicable debt
[[Page 39988]]
instrument. An electing corporation generally includes deferred COD
income ratably over the inclusion period. Paragraph (b) of this section
provides rules for the mandatory acceleration of an electing
corporation's remaining deferred COD income, the mandatory acceleration
of a C corporation issuer's deferred OID deductions, and for the
elective acceleration of an electing member's (other than the common
parent's) remaining deferred COD income. Paragraph (c) of this section
provides examples illustrating the application of the mandatory and
elective acceleration rules. Paragraph (d) of this section provides
rules for the computation of an electing corporation's earnings and
profits. Paragraph (e) of this section refers to the effective/
applicability dates.
(b) Acceleration events--(1) Deferred COD income. Except as
otherwise provided in paragraphs (b)(2) and (3) of this section, and
Sec. 1.108(i)-2(b)(6) (in the case of a corporate partner), an
electing corporation's deferred COD income is taken into account
ratably over the inclusion period.
(2) Mandatory acceleration events. An electing corporation takes
into account all of its remaining deferred COD income, including its
share of an electing partnership's deferred COD income, immediately
before the occurrence of any one of the events described in this
paragraph (b)(2) (mandatory acceleration events), regardless of whether
the electing corporation is in a title 11 or similar case at the time
the mandatory acceleration event occurs.
(i) Changes in tax status. The electing corporation changes its tax
status. For purposes of the preceding sentence, an electing corporation
is treated as changing its tax status if it becomes one of the
following entities:
(A) A tax-exempt entity as defined in Sec. 1.337(d)-4(c)(2).
(B) An S corporation as defined in section 1361(a)(1).
(C) A qualified subchapter S subsidiary as defined in section
1361(b)(3)(B).
(D) An entity operating on a cooperative basis within the meaning
of section 1381.
(E) A regulated investment company (RIC) as defined in section 851
or a real estate investment trust (REIT) as defined in section 856.
(F) A qualified REIT subsidiary as defined in section 856(i), but
only if the qualified REIT subsidiary was not a REIT immediately before
it became a qualified REIT subsidiary.
(ii) Cessation of corporate existence--(A) In general. The electing
corporation ceases to exist for Federal income tax purposes.
(B) Exception for section 381(a) transactions--(1) In general. The
electing corporation is not treated as ceasing to exist and is not
required to take into account its remaining deferred COD income solely
because its assets are acquired in a transaction to which section
381(a) applies. In such a case, the acquiring corporation succeeds to
the electing corporation's remaining deferred COD income and becomes
subject to section 108(i) and the regulations thereunder, including all
reporting requirements, as if the acquiring corporation were the
electing corporation. A transaction is not treated as one to which
section 381(a) applies for purposes of this paragraph (b)(2)(ii)(B) in
the following circumstances--
(i) The acquisition of the assets of an electing corporation by an
S corporation, if the acquisition is described in section 1374(d)(8);
(ii) The acquisition of the assets of an electing corporation by a
RIC or REIT, if the acquisition is described in Sec. 1.337(d)-
7(a)(2)(ii);
(iii) The acquisition of the assets of a domestic electing
corporation by a foreign corporation;
(iv) The acquisition of the assets of a foreign electing
corporation by a domestic corporation, if as a result of the
transaction, one or more exchanging shareholders include in income as a
deemed dividend the all earnings and profits amount with respect to
stock in the foreign electing corporation pursuant to Sec. 1.367(b)-
3(b)(3);
(v) The acquisition of the assets of an electing corporation by a
tax-exempt entity as defined in Sec. 1.337(d)-4(c)(2); or
(vi) The acquisition of the assets of an electing corporation by an
entity operating on a cooperative basis within the meaning of section
1381.
(2) Special rules for consolidated groups--(i) Liquidations. For
purposes of paragraph (b)(2)(ii)(B) of this section, the acquisition of
assets by distributee members of a consolidated group upon the
liquidation of an electing corporation is not treated as a transaction
to which section 381(a) applies, unless immediately prior to the
liquidation, one of the distributee members owns stock in the electing
corporation meeting the requirements of section 1504(a)(2) (without
regard to Sec. 1.1502-34). See Sec. 1.1502-80(g).
(ii) Taxable years. In the case of an intercompany transaction to
which section 381(a) applies, the transaction does not cause the
transferor or distributor to have a short taxable year for purposes of
determining the taxable year of the deferral and inclusion period.
(iii) Net value acceleration rule--(A) In general. The electing
corporation engages in an impairment transaction and, immediately after
the transaction, the gross value of the electing corporation's assets
(gross asset value) is less than one hundred and ten percent of the sum
of its total liabilities and the tax on the net amount of its deferred
items (the net value floor) (the net value acceleration rule).
Impairment transactions are any transactions, however effected, that
impair an electing corporation's ability to pay the amount of Federal
income tax liability on its deferred COD income and include, for
example, distributions (including section 381(a) transactions),
redemptions, below-market sales, charitable contributions, and the
incurrence of additional indebtedness without a corresponding increase
in asset value. Value-for-value sales or exchanges (for example, an
exchange to which section 351 or section 721 applies), or mere declines
in the market value of the electing corporation's assets are not
impairment transactions. In addition, an electing corporation's
investments and expenditures in pursuance of its good faith business
judgment are not impairment transactions. For purposes of determining
an electing corporation's gross asset value, the amount of any
distribution that is not treated as an impairment transaction under
paragraph (b)(2)(iii)(D) of this section (distributions and charitable
contributions consistent with historical practice) or under paragraph
(b)(2)(iii)(E) of this section (special rules for RICs and REITs) is
treated as an asset of the electing corporation. Solely for purposes of
computing the amount of the net value floor, the tax on the deferred
items is determined by applying the highest rate of tax specified in
section 11(b) for the taxable year.
(B) Transactions integrated. Any transaction that occurs before the
reacquisition of an applicable debt instrument, but that occurs
pursuant to the same plan as the reacquisition, is taken into account
in determining whether the gross asset value of the electing
corporation is less than the net value floor.
(C) Corrective action to restore net value. An electing corporation
is not required to take into account its deferred COD income under the
net value acceleration rule of paragraph (b)(2)(iii)(A) of this section
if, before the due date of the electing corporation's return (including
extensions), value is
[[Page 39989]]
restored in a transaction in an amount equal to the lesser of--
(1) The amount of value that was removed from the electing
corporation in one or more impairment transactions (net of amounts
previously restored under this paragraph (b)(2)(iii)(C)); or
(2) The amount by which the electing corporation's net value floor
exceeds its gross asset value.
For example, assume an electing corporation incurs $50 of debt,
distributes the $50 of proceeds to its shareholder, and immediately
after the distribution, the electing corporation's gross asset value is
below the net value floor by $25. The electing corporation may avoid
the inclusion of its remaining deferred COD income if value of at least
$25 is restored to it before the due date of the electing corporation's
tax return (including extensions) for the taxable year that includes
the distribution. The value that must be restored is determined at the
time of the impairment transaction on a net value basis (for example,
additional borrowings by an electing corporation do not restore value).
(D) Exceptions for distributions and charitable contributions that
are consistent with historical practice. An electing corporation's
distributions are not treated as impairment transactions (and are not
taken into account as a reduction of the electing corporation's gross
asset value when applying the net value acceleration rule to any
impairment transaction), to the extent that the distributions are
described in section 301(c) and the amount of these distributions, in
the aggregate, for the applicable taxable year (applicable distribution
amount) does not exceed the annual average amount of section 301(c)
distributions over the preceding three taxable years (average
distribution amount). If an electing corporation's applicable
distribution amount exceeds its average distribution amount (excess
amount), then the amount of the impairment transaction equals the
excess amount. Appropriate adjustments must be made to take into
account any issuances or redemptions of stock, or similar transactions,
occurring during the year of distribution or any of the three preceding
years. If the electing corporation has a short taxable year for the
year of the distribution or for any of the three preceding years, the
amounts are determined on an annualized basis. If an electing
corporation has been in existence for less than three years, the period
during which the electing corporation has been in existence is
substituted for the preceding three taxable years. For purposes of
determining an electing corporation's average distribution amount, the
electing corporation does not take into account the distribution
history of a distributor or transferor in a transaction to which
section 381(a) applies (other than a transaction described in section
368(a)(1)(F)). Rules similar to those prescribed in this paragraph
(b)(2)(iii)(D) also apply to an electing corporation's charitable
contributions (within the meaning of section 170(c)) that are
consistent with its historical practice.
(E) Special rules for RICs and REITs--(1) Distributions.
Notwithstanding paragraph (b)(2)(iii)(D) of this section, in the case
of a RIC or REIT, any distribution with respect to stock that is
treated as a dividend under section 852 or 857 is not treated as an
impairment transaction (and is not taken into account as a reduction in
gross asset value when applying the net value acceleration rule to any
impairment transaction).
(2) Redemptions by RICs. Any redemption of a redeemable security,
as defined in 15 U.S.C. section 80a-2(a)(32), by a RIC in the ordinary
course of business is not treated as an impairment transaction (and is
not taken into account as a reduction in gross asset value when
applying the net value acceleration rule to any impairment
transaction).
(F) Special rules for consolidated groups--(1) Impairment
transactions and net value acceleration rule. In the case of an
electing member, the determination of whether the member has engaged in
an impairment transaction is made on a group-wide basis. An electing
member is treated as engaging in an impairment transaction if any
member's transaction impairs the group's ability to pay the tax
liability associated with all electing members' deferred COD income.
Accordingly, intercompany transactions are not impairment transactions.
Similarly, the net value acceleration rule is applied by reference to
the gross asset value of all members (excluding stock of members
whether or not described in section 1504(a)(4)), the liabilities of all
members, and the tax on all members' deferred items. For example,
assume P is the common parent of the P-S consolidated group, S has a
section 108(i) election in effect, and S makes a $100 distribution to P
which, on a separate entity basis, would reduce S's gross asset value
below the net value floor. S's intercompany distribution to P is not an
impairment transaction. However, if P makes a $100 distribution to its
shareholder, P's distribution is an impairment transaction (unless the
distribution is consistent with its historical practice under paragraph
(b)(2)(iii)(D) of this section), and the net value acceleration rule is
applied by reference to the assets, liabilities, and deferred items of
the P-S group.
(2) Departing member. If an electing member that previously engaged
in one or more impairment transactions on a separate entity basis
ceases to be a member of a consolidated group (departing member), the
cessation is treated as an impairment transaction and the net value
acceleration rule under paragraph (b)(2)(iii)(A) of this section is
applied to the departing member on a separate entity basis immediately
after ceasing to be a member (and taking into account the impairment
transaction(s) that occurred on a separate entity basis). If the
departing member's gross asset value is below the net value floor, the
departing member's remaining deferred COD income is taken into account
immediately before the departing member ceases to be a member (unless
value is restored under paragraph (b)(2)(iii)(C) of this section). If
the departing member's deferred COD income is not accelerated, the
departing member is subject to the reporting requirements of section
108(i) on a separate entity basis. If the departing member becomes a
member of another consolidated group, the cessation is treated as an
impairment transaction and the net value acceleration rule under
paragraph (b)(2)(iii)(A) of this section is applied by reference to the
assets, liabilities, and the tax on deferred items of the members of
the acquiring group immediately after the transaction. If the acquiring
group's gross asset value is below the net value floor, the departing
member's remaining deferred COD income is taken into account
immediately before the departing member ceases to be a member (unless
value is restored under paragraph (b)(2)(iii)(C) of this section). If
the departing member's remaining deferred COD income is not
accelerated, the common parent of the acquiring group succeeds to the
reporting requirements of section 108(i) with respect to the departing
member.
(3) Elective acceleration for certain consolidated group members--
(i) In general. An electing member (other than the common parent) of a
consolidated group may elect at any time to accelerate in full (and not
in part) the inclusion of its remaining deferred COD income with
respect to all applicable debt instruments by filing a statement
described in paragraph (b)(3)(ii) of this section. Once made, an
election to accelerate deferred COD income under this paragraph (b)(3)
is irrevocable.
[[Page 39990]]
(ii) Time and manner for making election--(A) In general. The
election to accelerate the inclusion of an electing member's remaining
deferred COD income with respect to all applicable debt instruments is
made on a statement attached to a timely filed tax return (including
extensions) for the year in which the deferred COD income is taken into
account. The election is made by the common parent on behalf of the
electing member. See Sec. 1.1502-77(a).
(B) Additional information. The statement must include--
(1) Label. A label entitled ``SECTION 1.108(i)-1 ELECTION AND
INFORMATION STATEMENT BY [INSERT NAME AND EMPLOYER IDENTIFICATION
NUMBER OF THE ELECTING MEMBER]''; and
(2) Required Information. An identification of each applicable debt
instrument to which an election under this paragraph (b)(3) applies and
the corresponding amount of--
(i) Deferred COD income that is accelerated under this paragraph
(b)(3); and
(ii) Deferred OID deductions that are accelerated under paragraph
(b)(4) of this section.
(4) Deferred OID deductions--(i) In general. Except as otherwise
provided in paragraph (b)(4)(ii) of this section and Sec. 1.108(i)-
2(b)(6) (in the case of a C corporation partner), a C corporation
issuer's deferred OID deductions are taken into account ratably over
the inclusion period.
(ii) OID acceleration events. A C corporation issuer takes into
account all of its remaining deferred OID deductions with respect to a
debt instrument immediately before the occurrence of any one of the
events described in this paragraph (b)(4)(ii), regardless of whether
the C corporation issuer is in a title 11 or similar case.
(A) Inclusion of deferred COD income. An electing entity or its
owners take into account all of the remaining deferred COD income to
which the C corporation issuer's deferred OID deductions relate. If,
under Sec. 1.108(i)-2(b) or (c), an electing entity or its owners take
into account only a portion of the deferred COD income to which the
deferred OID deductions relate, then the C corporation issuer takes
into account a proportionate amount of the remaining deferred OID
deductions.
(B) Changes in tax status. The C corporation issuer changes its tax
status within the meaning of paragraph (b)(2)(i) of this section.
(C) Cessation of corporate existence--(1) In general. The C
corporation issuer ceases to exist for Federal income tax purposes.
(2) Exception for section 381(a) transactions--(i) In general. A C
corporation issuer is not treated as ceasing to exist and does not take
into account its remaining deferred OID deductions in a transaction to
which section 381(a) applies, taking into account the application of
Sec. 1.1502-34, as appropriate. See Sec. 1.1502-80(g). This exception
does not apply to a transaction that is not treated as one to which
section 381(a) applies under paragraph (b)(2)(iii)(B)(1) of this
section.
(ii) Taxable years. In the case of an intercompany transaction to
which section 381(a) applies, the transaction does not cause the
transferor or distributor to have a short taxable year for purposes of
determining the taxable year of the deferral and inclusion period.
(c) Examples. The application of this section is illustrated by the
following examples. Unless otherwise stated, P, S, S1, and X are
domestic C corporations, and each files a separate return on a calendar
year basis:
Example 1. Net value acceleration rule. (i) Facts. On January 1,
2009, S reacquires its own note and realizes $400 of COD income.
Pursuant to an election under section 108(i), S defers recognition
of the entire $400 of COD income. Therefore, absent a mandatory
acceleration event, S will take into account $80 of its deferred COD
income in each year of the inclusion period. On December 31, 2010, S
makes a $25 distribution to its sole shareholder, P, and this is the
only distribution made by S in the past four years. Immediately
following the distribution, S's gross asset value is $100, S has no
liabilities, and the Federal income tax on S's $400 of deferred COD
income is $140. Accordingly, S's net value floor is $154 (110% x
$140).
(ii) Analysis. Under paragraph (b)(2)(iii)(A) of this section,
S's distribution is an impairment transaction. Immediately following
the distribution, S's gross asset value of $100 is less than the net
value floor of $154. Accordingly, under the net value acceleration
rule of paragraph (b)(2)(iii)(A) of this section, S takes into
account its $400 of deferred COD income immediately before the
distribution.
(iii) Corrective action to restore value. The facts are the same
as in paragraph (i) of this Example 1, except that P contributes
assets with a value of $25 to S before the due date of S's 2010
return (including extensions). Because P restores $25 of value to S
(the lesser of the amount of value removed in the distribution ($25)
or the amount by which S's net value floor exceeds its gross asset
value ($54)), under paragraph (b)(2)(iii)(C) of this section, S does
not take into account its $400 of deferred COD income.
Example 2. Distributions consistent with historical practice.
(i) Facts. P, a publicly traded corporation, makes a valid section
108(i) election with respect to COD income realized in 2009. On
December 31, 2009, P distributes $25 million on its 5 million shares
of common stock outstanding. As of January 1, 2006, P has 10 million
shares of common stock outstanding, and on March 31, 2006, P
distributes $10 million on those 10 million shares. On September 15,
2006, P effects a 2:1 reverse stock split, and on December 31, 2006,
P distributes $10 million on its 5 million shares of common stock
outstanding. In each of 2007 and 2008, P distributes $5 million on
its 5 million shares of common stock outstanding. All of the
distributions are described in section 301(c).
(ii) Amount of impairment transaction. Under paragraph
(b)(2)(iii)(D) of this section, P's 2009 distributions are not
treated as impairment transactions (and are not taken into account
as a reduction of P's gross asset value when applying the net value
acceleration rule to any impairment transaction), to the extent that
the aggregate amount distributed in 2009 (the applicable
distribution amount) does not exceed the annual average amount of
distributions (the average distribution amount) over the preceding
three taxable years. Accordingly, P's applicable distribution amount
for 2009 is $25 million, and its average distribution amount is $10
million ($20 million (2006) plus $5 million (2007) plus $5 million
(2008) divided by 3). The reverse stock split in 2006 is not a
transaction requiring an adjustment to the determination of the
average distribution amount. Because P's applicable distribution
amount of $25 million exceeds its average distribution amount of $10
million, under paragraph (b)(2)(iii)(D) of this section, the amount
of P's 2009 distribution that is treated as an impairment
transaction is $15 million. The balance of the 2009 distribution,
$10 million, is not treated as an impairment transaction (and is not
taken into account as a reduction in P's gross asset value when
applying the net value acceleration rule to any impairment
transaction).
(iii) Distribution history. The facts are the same as in
paragraph (i) of this Example 2, except that in 2010, P merges into
X in a transaction to which section 381(a) applies, with X
succeeding to P's deferred COD income, and X makes a distribution to
its shareholders. For purposes of determining whether X's
distribution is consistent with its historical practice, the average
distribution amount is determined solely with respect to X's
distribution history.
Example 3. Cessation of corporate existence. (i) Transaction to
which section 381(a) applies. P owns all of the stock of S. In 2009,
S reacquires its own note and elects to defer recognition of its
$400 of COD income under section 108(i). On December 31, 2010, S
liquidates into P in a transaction that qualifies under section 332.
Under paragraph (b)(2) of this section, S must take into account all
of its remaining deferred COD income upon the occurrence of any one
of the mandatory acceleration events. Although S ceases its
corporate existence as a result of the liquidation, S is not
required to take into account its remaining deferred COD income
under the exception in paragraph (b)(2)(ii)(B) of this section
because its assets are acquired in a transaction to which section
381(a) applies. However, under paragraph (b)(2)(iii)(A) of this
section, S's distribution to P is an impairment
[[Page 39991]]
transaction and the net value acceleration rule is applied with
respect to the assets, liabilities, and deferred items of P (S's
successor) immediately following the distribution. If S's deferred
COD income is not taken into account under the net value
acceleration rule of (b)(2)(iii) of this section, P succeeds to S's
remaining deferred COD income and to S's reporting requirements as
if P were the electing corporation.
(ii) Debt-laden distributee. The facts are the same as in
paragraph (i) of this Example 3, except that in the liquidation, S
distributes $100 of assets to P, a holding company whose only asset
is its stock in S. Assume that immediately following the
distribution, P's gross asset value is $100, P has $60 of
liabilities, and the Federal income tax on the $400 of deferred COD
income is $140. Under paragraph (b)(2) of this section, S must take
into account all of its remaining deferred COD income upon the
occurrence of any one of the mandatory acceleration events. Although
S ceases its corporate existence as a result of the liquidation, S
is not required to take into account its remaining deferred COD
income under the exception in paragraph (b)(2)(ii)(B) of this
section because its assets are acquired in a transaction to which
section 381(a) applies. However, under paragraph (b)(2)(iii)(A) of
this section, S's distribution to X is an impairment transaction and
the net value acceleration rule is applied with respect to the
assets, liabilities, and deferred items of P (S's successor).
Immediately following the distribution, P's gross asset value of
$100 is less than the net value floor of $220 [110% x ($60 + $140)].
Accordingly, under the net value acceleration rule of paragraph
(b)(2)(iii)(A) of this section, S is required to take into account
its $400 of deferred COD income immediately before the distribution,
unless value is restored to P pursuant to (b)(2)(iii)(C) of this
section.
(iii) Foreign acquirer. The facts are the same as in paragraph
(i) of this Example 3, except that P is a foreign corporation.
Although S's assets are acquired in a transaction to which section
381(a) applies, under paragraph (b)(2)(ii)(B)(1)(iii) of this
section, the exception to accelerated inclusion does not apply and S
takes into account its remaining deferred COD income immediately
before the liquidation. See also section 367(e)(2) and the
regulations thereunder.
(iv) Section 338 transaction. P, the common parent of a
consolidated group (P group), owns all the stock of S1, one of the
members of the P group. In 2009, S1 reacquires its own indebtedness
and realizes $30 of COD income. Pursuant to an election under
section 108(i), S1 defers recognition of the entire $30 of COD
income. In 2010, P sells all the stock of S1 to X, an unrelated
corporation, for $300, and P and X make a timely section 338(h)(10)
election with respect to the sale. Under paragraph (b)(2)(ii)(A) of
this section, an electing corporation takes into account its
remaining deferred COD income when it ceases its existence for
Federal income tax purposes unless the exception in paragraph
(b)(2)(ii)(B) of this section applies. Pursuant to section
338(h)(10) and the regulations, S1 is treated as transferring all of
its assets to an unrelated person in exchange for consideration that
includes the discharge of its liabilities. This deemed value-for-
value exchange is not an impairment transaction. Following the
deemed sale, while S1 is still a member of the P group, S1 is
treated as distributing all of its assets to P and as ceasing its
existence. Under these facts, the distribution of all of S1's assets
constitutes a deemed liquidation, and is a transaction to which
sections 332 and 381(a) apply. Although S1 ceases its corporate
existence as a result of the liquidation, S1 is not required to take
into account its remaining deferred COD income under the exception
in paragraph (b)(2)(ii)(B) of this section because its assets are
acquired in a transaction to which section 381(a) applies. P
succeeds to S1's remaining deferred COD income and to S1's reporting
requirements as if P were the electing corporation. Under paragraph
(b)(2)(iii)(F)(1) of this section, the intercompany distribution
from S1 to P is not an impairment transaction.
(d) Earnings and profits--(1) In general. Deferred COD income
increases earnings and profits in the taxable year that it is realized
and not in the taxable year or years that the deferred COD income is
includible in gross income. Deferred OID deductions decrease earnings
and profits in the taxable year or years in which the deduction would
be allowed without regard to section 108(i).
(2) Exceptions--(i) RICs and REITs. Notwithstanding paragraph
(d)(1) of this section, deferred COD income increases earnings and
profits of a RIC or REIT in the taxable year or years in which the
deferred COD income is includible in gross income and not in the year
that the deferred COD income is realized. Deferred OID deductions
decrease earnings and profits of a RIC or REIT in the taxable year or
years that the deferred OID deductions are deductible.
(ii) Alternative minimum tax. For purposes of calculating
alternative minimum taxable income, any items of deferred COD income or
deferred OID deduction increase or decrease, respectively, adjusted
current earnings under section 56(g)(4) in the taxable year or years
that the item is includible or deductible.
(e) Effective/applicability dates. For effective/applicability
dates, see Sec. 1.108(i)-0(b).
Sec. 1.108(i)-1T [Removed].
0
Par. 5. Section 1.108(i)-1T is removed.
0
Par. 6. Section 1.108(i)-3 is added to read as follows:
Sec. 1.108(i)-3 Rules for the deduction of OID.
(a) Deemed debt-for-debt exchanges--(1) In general. For purposes of
section 108(i)(2) (relating to deferred OID deductions that arise in
certain debt-for-debt exchanges involving the reacquisition of an
applicable debt instrument), if the proceeds of any debt instrument are
used directly or indirectly by the issuer or a person related to the
issuer (within the meaning of section 108(i)(5)(A)) to reacquire an
applicable debt instrument, the debt instrument shall be treated as
issued for the applicable debt instrument being reacquired. Therefore,
section 108(i)(2) may apply, for example, to a debt instrument issued
by a corporation for cash in which some or all of the proceeds are used
directly or indirectly by the corporation's related subsidiary in the
reacquisition of the subsidiary's applicable debt instrument.
(2) Directly or indirectly. Whether the proceeds of an issuance of
a debt instrument are used directly or indirectly to reacquire an
applicable debt instrument depends upon all of the facts and
circumstances surrounding the issuance and the reacquisition. The
proceeds of an issuance of a debt instrument will be treated as being
used indirectly to reacquire an applicable debt instrument if--
(i) At the time of the issuance of the debt instrument, the issuer
of the debt instrument anticipated that an applicable debt instrument
of the issuer or a person related to the issuer would be reacquired by
the issuer, and the debt instrument would not have been issued if the
issuer had not so anticipated such reacquisition;
(ii) At the time of the issuance of the debt instrument, the issuer
of the debt instrument or a person related to the issuer anticipated
that an applicable debt instrument would be reacquired by a related
person and the related person receives cash or property that it would
not have received unless the reacquisition had been so anticipated; or
(iii) At the time of the reacquisition, the issuer or a person
related to the issuer foresaw or reasonably should have foreseen that
the issuer or a person related to the issuer would be required to issue
a debt instrument, which it would not have otherwise been required to
issue if the reacquisition had not occurred, in order to meet its
future economic needs.
(b) Proportional rule for accruals of OID. For purposes of section
108(i)(2), if only a portion of the proceeds from the issuance of a
debt instrument are used directly or indirectly to reacquire an
applicable debt instrument, the rules of section 108(i)(2)(A) will
apply to the portion of OID on the debt instrument that is equal to the
portion of the proceeds from such instrument used to reacquire the
outstanding applicable
[[Page 39992]]
debt instrument. Except as provided in the last sentence of section
108(i)(2)(A), the amount of deferred OID deduction that is subject to
section 108(i)(2)(A) for a taxable year is equal to the product of the
amount of OID that accrues in the taxable year under section 1272 or
section 1275 (and the regulations under those sections), whichever
section is applicable, and a fraction, the numerator of which is the
portion of the total proceeds from the issuance of the debt instrument
used directly or indirectly to reacquire the applicable debt instrument
and the denominator of which is the total proceeds from the issuance of
the debt instrument.
(c) No acceleration--(1) Retirement. Retirement of a debt
instrument subject to section 108(i)(2) does not accelerate deferred
OID deductions.
(2) Cross-reference. See Sec. 1.108(i)-1 and Sec. 1.108(i)-2 for
rules relating to the acceleration of deferred OID deductions.
(d) Examples. The application of this section is illustrated by the
following examples. Unless otherwise stated, all taxpayers in the
following examples are calendar-year taxpayers, and P and S each file
separate returns:
Example 1. (i) Facts. P, a domestic corporation, owns all of the
stock of S, a domestic corporation. S has a debt instrument
outstanding that has an adjusted issue price of $100,000. On January
1, 2010, P issues for $160,000 a four-year debt instrument that has
an issue price of $160,000 and a stated redemption price at maturity
of $200,000, resulting in $40,000 of OID. In P's discussion with
potential lenders/holders, and as described in offering materials
provided to potential lenders/holders, P disclosed that it planned
to use all or a portion of the proceeds from the issuance of the
debt instrument to reacquire outstanding debt of P and its
affiliates. Following the issuance, P makes a $70,000 capital
contribution to S. S then reacquires its debt instrument from X, a
person not related to S within the meaning of section 108(i)(5)(A),
for $70,000. At the time of the reacquisition, the adjusted issue
price of S's debt instrument is $100,000. Under Sec. 1.61-12(c), S
realizes $30,000 of COD income. S makes a section 108(i) election
for the $30,000 of COD income.
(ii) Analysis. Under the facts, at the time of P's issuance of
its $160,000 debt instrument, P anticipated that the loan proceeds
would be used to reacquire the debt of S, and P's debt instrument
would not have been issued for an amount greater than $90,000 if P
had not anticipated that S would use the proceeds to reacquire its
debt. Pursuant to paragraph (a) of this section, the proceeds from
P's issuance of its debt instrument are treated as being used
indirectly to reacquire S's applicable debt instrument. Therefore,
section 108(i)(2)(B) applies to P's debt instrument and P's OID
deductions on its debt instrument are subject to deferral under
section 108(i)(2)(A). However, because only a portion of the
proceeds from P's debt instrument are used by S to reacquire its
applicable debt instrument, only a portion of P's total OID
deductions will be deferred under section 108(i)(2)(A). See section
108(i)(2)(B). Accordingly, a maximum of $17,500 ($40,000 x $70,000/
$160,000) of P's $40,000 total OID deductions is subject to deferral
under section 108(i)(2)(A). Under paragraph (b) of this section, the
amount of P's deferred OID deduction each taxable year under section
108(i)(2)(A) is equal to the product of the amount of OID that
accrues in the taxable year under section 1272 for the debt
instrument and a fraction ($70,000/$160,000). As a result, P's
deferred OID deductions are the following amounts: $4,015.99 for
2010 ($9,179.40 x $70,000/$160,000); $4,246.39 for 2011 ($9,706.04 x
$70,000/$160,000); $4,490.01 for 2012 ($10,262.88 x $70,000/
$160,000); and $4,747.61 for 2013 ($10,851.68 x $70,000/$160,000).
Example 2. (i) Facts. The facts are the same as in Example 1,
except that S makes a section 108(i) election for only $10,000 of
the $30,000 of COD income.
(ii) Analysis. The maximum amount of P's deferred OID deductions
under section 108(i)(2)(A) is $10,000 rather than $17,500 because S
made a section 108(i) election for only $10,000 of the $30,000 of
COD income. Under section 108(i)(2)(A), because the amount of OID
that accrues prior to 2014 attributable to the portion of the debt
instrument issued to indirectly reacquire S's applicable debt
instrument under paragraph (b) of this section ($17,500) exceeds the
amount of deferred COD income under section 108(i) ($10,000), P's
deferred OID deductions are the following amounts: $4,015.99 for
2010; $4,246.39 for 2011; $1,737.62 for 2012; and $0 for 2013.
Example 3. (i) Facts. The facts are the same as in Example 1,
except that P pays $200,000 in cash to the lenders/holders on
December 31, 2012, to retire the debt instrument. P did not directly
or indirectly obtain the funds to retire the debt instrument from
the issuance of another debt instrument with OID.
(ii) Analysis. Under paragraph (c)(1) of this section, the
retirement of P's debt instrument is not an acceleration event for
the deferred OID deductions of $4,015.99 for 2010, $4,246.39 for
2011, and $4,490.01 for 2012. Except as provided in Sec. 1.108(i)-
1(b)(4), these amounts will be taken into account during the
inclusion period. P, however, paid a repurchase premium of
$10,851.68 in 2012 ($200,000 minus the adjusted issue price of
$189,148.32) to retire the debt instrument. If otherwise allowable,
P may deduct this amount in 2012 under Sec. 1.163-7(c).
(e) Effective/applicability dates. For effective/applicability
dates, see Sec. 1.108(i)-0(b).
Sec. 1.108(i)-3T [Removed]
0
Par. 7. Section 1.108(i)-3T is removed.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
0
Par. 8. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
0
Par. 9. In Sec. 602.101, paragraph (b) is revised as follows:
0
1. The following entry to the table is removed:
Sec. 602.101 OMB Control Numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control no.
------------------------------------------------------------------------
* * * * *
1.108(i)-1T............................................. 1545-2147
* * * * *
------------------------------------------------------------------------
* * * * *
0
2. The following entry is added in numerical order to the table:
Sec. 602.101 OMB Control Numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control no.
------------------------------------------------------------------------
* * * * *
1.108(i)-1.............................................. 1545-2147
* * * * *
------------------------------------------------------------------------
Beth Tucker,
Deputy Commissioner for Operations Support.
Approved: June 11, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-15881 Filed 7-2-13; 8:45 am]
BILLING CODE 4830-01-P