Guidance Regarding Deferred Discharge of Indebtedness Income of Corporations and Deferred Original Issue Discount Deductions, 39984-39992 [2013-15881]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Rules and Regulations]
[Pages 39984-39992]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15881]


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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.

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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 https://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.
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1.108(i)-1..............................................       1545-2147
 
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 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