Guidance Under Section 108(a) Concerning the Exclusion of Section 61(a)(12) Discharge of Indebtedness Income of a Grantor Trust or a Disregarded Entity, 37504-37507 [2016-13779]
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Federal Register / Vol. 81, No. 112 / Friday, June 10, 2016 / Rules and Regulations
Human Drug Products Under Section
503A of the FD&C Act,’’ (503A Final
Guidance) published in 2014 (79 FR
37742) and revised in 2015 (80 FR
65781). That guidance stated, ‘‘Until a
bulk drug substances list is published in
the Federal Register as a final rule,
human drug products should be
compounded using only bulk drug
substances that are components of drugs
approved under section 505 of the FD&C
Act, or are the subject of USP or NF
monographs.’’
When FDA issued the interim
guidance concerning compounding
using certain bulk drug substances
under section 503A (Interim 503A Bulks
Guidance) as a draft guidance for public
comment, FDA announced in the notice
of availability that because this draft
interim guidance proposed to change
the Agency’s policy relating to
compounding with bulk drug
substances while FDA develops a list of
bulk drug substances that can be used
in compounding, FDA was adding a
footnote to the 503A final guidance
referencing this draft interim guidance.
FDA stated that once this Interim 503A
Bulks Guidance is finalized, FDA would
remove that footnote from the 503A
final guidance and cross-reference the
final Interim 503A Bulks Guidance as
establishing the policy for compounding
with bulk drug substances during the
development of the 503A bulks list.
Therefore, concurrent with the
issuance of the final Interim 503A Bulks
Guidance, FDA is removing the
sentence in the 503A final guidance
referenced previously and is replacing it
with the following statement, which the
Agency proposed for public comment in
the draft Interim 503A Bulks Guidance:
‘‘FDA’s interim policy concerning bulk
drug substances that are not
components of drugs approved under
section 505 of the FD&C Act or that are
not the subject of applicable USP or NF
monographs can be found in the
guidance, ‘Interim Policy on
Compounding Using Bulk Drug
Substances Under Section 503A of the
Federal Food, Drug and Cosmetic Act.’ ’’
This change is a Level 2 change under
21 CFR 10.115, and comments on the
proposed change in policy were
solicited as part of the notice of
availability of the draft Interim 503A
Bulks Guidance.
II. Electronic Access
Persons with access to the Internet
may obtain the guidance at either https://
www.fda.gov/Drugs/Guidance
ComplianceRegulatoryInformation/
Guidances/default.htm or https://
www.regulations.gov.
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Dated: June 7, 2016.
Leslie Kux,
Associate Commissioner for Policy.
[FR Doc. 2016–13799 Filed 6–9–16; 8:45 am]
BILLING CODE 4164–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9771]
RIN 1545–BJ14
Guidance Under Section 108(a)
Concerning the Exclusion of Section
61(a)(12) Discharge of Indebtedness
Income of a Grantor Trust or a
Disregarded Entity
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulation.
AGENCY:
This document contains final
regulations relating to the exclusion
from gross income of discharge of
indebtedness income of a grantor trust
or an entity that is disregarded as an
entity separate from its owner. These
final regulations provide rules regarding
the term ‘‘taxpayer’’ for purposes of
applying the exclusion from gross
income of discharge of indebtedness
income of a grantor trust or a
disregarded entity. These final
regulations affect grantor trusts,
disregarded entities, and their owners.
DATES: Effective Date: These regulations
are effective on June 10, 2016.
Applicability Date: These regulations
apply to discharge of indebtedness
income occurring on or after June 10,
2016.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
Frank J. Fisher or Amy Chang, (202)
317–6850 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These final regulations contain
amendments to the Income Tax
Regulations (26 CFR part 1) under
section 108 of the Internal Revenue
Code (Code). Section 61(a)(12) provides
that income from the discharge of
indebtedness is includible in gross
income. However, such income may be
excludable from gross income under
section 108 in certain circumstances.
Section 108(a)(1)(A) and (B) exclude
from gross income any amount that
would be includible in gross income by
reason of the discharge of indebtedness
of the taxpayer if the discharge occurs
in a title 11 case or when the taxpayer
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is insolvent. Section 108(d)(1) through
(3) provide the meaning of the terms
‘‘indebtedness of the taxpayer,’’ ‘‘title 11
case,’’ and ‘‘insolvent,’’ for purposes of
applying section 108, and each
definition uses the term ‘‘taxpayer.’’
Section 7701(a)(14) defines ‘‘taxpayer’’
as any person subject to any internal
revenue tax.
On April 13, 2011, the Treasury
Department and the IRS published in
the Federal Register (76 FR 20593) a
notice of proposed rulemaking (REG–
154159–09) (the proposed regulations)
to provide rules under section 108(a)
regarding the term ‘‘taxpayer’’ for
purposes of applying section 108 to the
discharge of indebtedness income of a
grantor trust or an entity that is
disregarded as an entity separate from
its owner (disregarded entity). The
proposed regulations provide that, for
purposes of applying section
108(a)(1)(A) and (B) to the discharge of
indebtedness income of a grantor trust
or a disregarded entity, the term
‘‘taxpayer,’’ as used in section 108(a)(1)
and (d)(1) through (3), refers to the
owner of the grantor trust or the
disregarded entity. The proposed
regulations also provide that, in the case
of a partnership, the owner rules apply
at the partner level to the partners to
whom the discharge of indebtedness is
allocable. For example, if a partnership
holds an interest in a grantor trust or a
disregarded entity, the applicability of
section 108(a)(1)(A) and (B) to the
discharge of indebtedness income is
tested by looking to each partner to
whom the income is allocable. Lastly,
the proposed regulations clarify that,
subject to the special rule for
partnerships under section 108(d)(6),
the insolvency exclusion is available
only if the owner is insolvent and the
bankruptcy exclusion is available only if
the owner is under the bankruptcy
court’s jurisdiction.
The Treasury Department and the IRS
received written comments responding
to the notice of proposed rulemaking.
The comments are available for public
inspection at www.regulations.gov. No
public hearing was requested or held.
The comments are discussed in this
preamble.
Summary of Comments and
Explanation of Revisions
After consideration of all the
comments, the final regulations adopt
the proposed regulations as modified by
this Treasury decision. The purpose and
scope of the proposed regulations and
these final regulations are primarily
limited to defining the term ‘‘taxpayer’’
for purposes of applying the bankruptcy
and the insolvency exclusions from
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gross income, under section 108(a)(1)(A)
and (B), to the discharge of indebtedness
income of a grantor trust or a
disregarded entity. These final
regulations are not intended to address
section 108 in general and are not
intended to address liabilities in
general.
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1. Other Exclusions Under Section
108(a)
Two commenters recommended that
the final regulations apply the
provisions of the proposed regulations
to all exclusions in section 108(a), not
only to the bankruptcy and the
insolvency exclusions. Guidance on the
other exclusions in section 108(a) is
beyond the scope of these regulations.
2. Whether, Under Section 108(d)(2), the
Owner Is ‘‘Under the Jurisdiction’’ of the
Court in a Title 11 Case
Section 108(a)(1)(A) provides, in part,
that gross income does not include any
amount which would be includible in
gross income by reason of the discharge
of the indebtedness of the taxpayer if
the discharge occurs in a title 11 case.
Section 108(d)(2) defines ‘‘title 11 case’’
as a case under title 11 of the United
States Code (relating to bankruptcy), but
only if the taxpayer is under the
jurisdiction of the court in such case
and the discharge of indebtedness is
granted by the court or is pursuant to a
plan approved by the court.
Consistent with the proposed
regulations, these regulations provide
that the bankruptcy exclusion is
available only if the owner of the
grantor trust or the owner of the
disregarded entity is under the
jurisdiction of the court in a title 11
case. It is insufficient for the grantor
trust or the disregarded entity to be
under the jurisdiction of the court in a
title 11 case. These regulations further
clarify that the owner of the grantor
trust or the owner of the disregarded
entity must be under the jurisdiction of
the court in a title 11 case of that owner
as the ‘‘debtor,’’ as that term is defined
in title 11 of the United States Code (the
title 11 debtor).
The commenters suggested that
section 108(d)(2) does not require that
the taxpayer be a title 11 debtor to be
considered under the jurisdiction of the
court in a title 11 case. One commenter
recommended that an owner of a grantor
trust or a disregarded entity be
considered under the jurisdiction of the
court in a title 11 case when that owner
is indirectly liable for the debt of the
grantor trust or the disregarded entity
and the court in a title 11 case
eliminates the owner’s liability in
conjunction with the cancellation of the
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debt of the grantor trust or disregarded
entity. Another commenter
recommended that an owner of a grantor
trust or a disregarded entity be
considered under the jurisdiction of the
court in a title 11 case when either the
owner has taken affirmative actions,
such as filing a proof of claim or a proof
of interest, that place the owner under
the court’s jurisdiction in a title 11 case,
or the court otherwise asserts
jurisdiction over the owner in
connection with a title 11 case. A third
commenter recommended that the
owner of a disregarded entity be
considered under the jurisdiction of the
court in a title 11 case when: (1) The
court asserts jurisdiction over that
owner during the title 11 proceeding of
the disregarded entity; (2) the owner’s
liability on the discharged debt had
been previously established (by contract
or otherwise); (3) the owner is liable for
all, or substantially all, of the
discharged debt; and (4) qualifying for
the bankruptcy exclusion was not a
principal purpose of the owner’s
undertaking of such liability.
The Treasury Department and the IRS
have not adopted these
recommendations because extending the
bankruptcy exclusion to the owner of a
grantor trust or a disregarded entity
when that owner is not itself in
bankruptcy would be inconsistent with
the intended purpose of section
108(a)(1)(A), as reflected in the
legislative history of that provision.
Congress added the bankruptcy
exclusion to the Code to allow insolvent
debtors a ‘‘fresh start’’ after they have
liquidated their assets to pay off
creditors. S. Rep. No. 1035, 96th Cong.,
2d Sess. 9–10 (1980), 1980–2 CB 620,
624, provides:
The rules of the [Bankruptcy Tax Act of
1980, Public Law 96–589, 94 Stat. 3389
(1980)] concerning income tax treatment of
debt discharge in bankruptcy are intended to
accommodate bankruptcy policy and tax
policy. To preserve the debtor’s ‘‘fresh start’’
after bankruptcy, the bill provides that no
income is recognized by reason of debt
discharge in bankruptcy, so that a debtor
coming out of bankruptcy (or an insolvent
debtor outside bankruptcy) is not burdened
with an immediate tax liability.
Here, Congress was referring to ‘‘debtor’’
as that term is defined in title 11. See
11 U.S.C. 101(12) (1980) (defining
‘‘debtor’’ as a person or municipality
concerning which a case under title 11
has been commenced).
The Bankruptcy Tax Act of 1980 was
enacted to supplement the Bankruptcy
Reform Act of 1978, Public Law 95–598,
92 Stat. 2549 (1978). See S. Rep. No.
1035, 96th Cong., 2d Sess. 9 (1980),
1980–2 CB 620, 624. As indicated in the
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legislative history of the Bankruptcy
Reform Act of 1978, the debtor’s ‘‘fresh
start’’ is conditioned upon the debtor
committing all of its nonexempt assets
to the jurisdiction of the bankruptcy
court, either for sale by the trustee or to
determine an appropriate plan to repay
creditors. See H.R. Rep. No. 595, 95th
Cong., 1st Sess. 118, 125–26, 176 (1977).
Congress did not intend that a solvent,
non-debtor owner of a grantor trust or a
disregarded entity, which has
committed some but not all of its
nonexempt assets to the bankruptcy
court’s jurisdiction, have an exclusion
from discharge of indebtedness income
merely by virtue of having some of its
assets subject to the jurisdiction of the
bankruptcy court.
The commenters’ recommendations
are thus inconsistent with the
Congressional intent underlying the
Bankruptcy Tax Act of 1980 because
those recommendations would provide
a non-debtor owner that conducts only
some of its activities through the grantor
trust or disregarded entity with an
unwarranted benefit when that owner is
not a title 11 debtor and is able to pay
its tax liability.
Accordingly, these regulations clarify
that the owner of the grantor trust or
disregarded entity must itself be under
the jurisdiction of the court in a title 11
case as the title 11 debtor to qualify for
the bankruptcy exclusion.
3. The Gracia Cases and the Application
of the Bankruptcy Exclusion at the
Partner Level
A commenter noted uncertainty under
existing law as to whether the holding
in certain case law would be followed
by the IRS. See Gracia v. Commissioner,
T.C. Memo. 2004–147; Mirarchi v.
Commissioner, T.C. Memo. 2004–148;
Price v. Commissioner, T.C. Memo.
2004–149; Estate of Martinez v.
Commissioner, T.C. Memo. 2004–150
(collectively, the Gracia Cases). Because
the bankruptcy court had asserted
jurisdiction over non-debtor partners for
certain matters, the Tax Court in the
Gracia Cases upheld the application of
the bankruptcy exclusion to the partners
of a partnership that was a title 11
debtor, despite the fact that the partners
were not title 11 debtors. The IRS’s
position is that the Gracia Cases failed
to interpret correctly the limited scope
of section 108(a)(1)(A), which applies
only to partners that are also title 11
debtors. See Action on Decision 2015–
01 (2015–6 IRB 579) (nonacquiescence
in the Gracia Cases).
These regulations provide that, in the
case of a partnership that holds an
interest in a grantor trust or a
disregarded entity, the owner rules
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apply at the level of the partners to
whom the income is allocable. These
regulations provide that the owner must
be under the jurisdiction of the court in
a title 11 case as the title 11 debtor to
qualify for the bankruptcy exclusion.
Accordingly, when the owner of the
grantor trust or disregarded entity is a
partnership, the partner to whom the
income is allocable must be under the
jurisdiction of the court in a title 11 case
of that partner as the title 11 debtor to
qualify for the bankruptcy exclusion.
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4. Whether a Grantor Trust Can Be a
Debtor in a Title 11 Case
One commenter noted that a trust
cannot generally be a debtor in a title 11
case. On the other hand, a business trust
can be a debtor in a title 11 case but is
generally treated as a business entity for
both bankruptcy and Federal tax
purposes. As such, the commenter
noted uncertainty as to whether these
regulations concerning the bankruptcy
exclusion could ever apply to the
bankruptcy of a grantor trust.
These regulations account for the
possibility that a trust that is treated as
a grantor trust for Federal tax purposes
may be treated as a business trust for
purposes of eligibility to be a debtor in
a title 11 case. To provide
comprehensive guidance, the Treasury
Department and the IRS have retained
references in these regulations to grantor
trusts in the provisions concerning the
bankruptcy exclusion.
5. Multiple-Owner Grantor Trusts
A grantor trust is any portion of a
trust that is treated, under subpart E of
part I of subchapter J of chapter 1, as
being owned by a grantor or another
person. One commenter recommended
that future guidance specify how a
grantor’s share of a multiple-owner
grantor trust’s liability should be
determined for purposes of determining
insolvency under section 108(d)(3).
Specifically, that commenter
recommended that future guidance or
tax forms provide that a grantor trust is
required to report the owner’s share of
the trust’s liabilities. These regulations
do not address these issues but the
Treasury Department and the IRS invite
comments regarding the application of
section 108(d)(3) to the owners of a
multiple-owner grantor trust.
Submissions should be submitted to:
In the case of submissions to the IRS
submitted by U.S. Mail: Internal
Revenue Service, Attn: Frank J. Fisher,
CC:PSI:1, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
In the case of submissions to the IRS
submitted by a private delivery service:
Internal Revenue Service, Attn: Frank J.
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Fisher, CC:PSI:1, 1111 Constitution Ave.
NW., Washington, DC 20224.
6. Extent to Which Indebtedness of a
Grantor Trust or a Disregarded Entity Is
Treated as Indebtedness of the Owner,
Whether Indebtedness Is Recourse or
Nonrecourse Debt of the Owner, and the
Effect on Insolvency
For purposes of section 108, section
108(d)(1) defines the term
‘‘indebtedness of the taxpayer’’ as any
indebtedness for which the taxpayer is
liable or subject to which the taxpayer
holds property. One commenter
recommended that the final regulations
clarify that, for purposes of section
108(d)(1), indebtedness of a disregarded
entity is indebtedness of the owner. In
addition, a commenter recommended
that the Treasury Department and the
IRS clarify whether debt of a
disregarded entity should be treated as
recourse or nonrecourse debt of the
owner for purposes of determining the
amount of cancellation of debt income
realized by the owner. That commenter
suggested that the Treasury Department
and the IRS issue guidance, in the form
of an example in a regulation or a
revenue ruling, as to whether the
indebtedness of a grantor trust or a
disregarded entity is recourse or
nonrecourse indebtedness of the owner.
In addition, commenters
recommended approaches for
determining the extent to which
liabilities of a grantor trust or a
disregarded entity are taken into
account in measuring the owner’s
insolvency under section 108(d)(3) for
purposes of the insolvency exclusion
under section 108(a)(1)(B), including
applying the principles of Revenue
Ruling 92–53 (1992–2 CB 48). For
purposes of the insolvency exclusion,
section 108(d)(3) defines ‘‘insolvency’’
as the excess of liabilities over the fair
market value of assets. Revenue Ruling
92–53 provides that the amount by
which a nonrecourse debt exceeds the
fair market value of the property
securing the debt (excess nonrecourse
debt) is taken into account in
determining whether a taxpayer is
insolvent within the meaning of section
108(d)(3) only to the extent that the
excess nonrecourse debt is discharged.
Comprehensive guidance on these
issues is beyond the scope of these
regulations. However, the Treasury
Department and the IRS are of the view
that indebtedness of a grantor trust or a
disregarded entity is indebtedness of the
owner for purposes of section 108(d)(1);
assuming the owner has not guaranteed
the indebtedness and is not otherwise
liable for the indebtedness under
applicable law, such indebtedness
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should generally be treated as
nonrecourse indebtedness for purposes
of applying the section 108(a)(1)(B)
insolvency exclusion; and accordingly
the principles of Revenue Ruling 92–53
apply to determine the extent to which
such indebtedness is taken into account
in determining the owner’s insolvency
under section 108(d)(3). The Treasury
Department and the IRS continue to
study these issues and anticipate
publishing additional guidance
providing further clarification.
Accordingly, the Treasury Department
and the IRS invite comments on these
issues. Submissions should be
submitted to:
In the case of submissions to the IRS
submitted by U.S. Mail: Internal
Revenue Service, Attn: Seoyeon Sharon
Park, CC:ITA:5, P.O. Box 7604, Ben
Franklin Station, Washington, DC
20044.
In the case of submissions to the IRS
submitted by a private delivery service:
Internal Revenue Service, Attn: Seoyeon
Sharon Park, CC:ITA:5, 1111
Constitution Ave. NW., Washington, DC
20224.
7. Valuation Discounts for Purposes of
Section 108(d)(3)
One commenter requested that the
Treasury Department and the IRS clarify
whether valuation discounts, if
applicable to the owner’s interest in a
disregarded entity, could apply to the
valuation of the assets and liabilities
held by a disregarded entity for
purposes of determining insolvency
under section 108(d)(3). Guidance on
this issue is beyond the scope of these
regulations.
8. Effective/Applicability Date
These final regulations apply to the
discharge of indebtedness income
occurring on or after the date these final
regulations are published in the Federal
Register.
Some commenters requested that the
Treasury Department and the IRS permit
taxpayers to apply the final regulations
retroactively to taxable years for which
the period of limitations remain open.
Another commenter requested that the
final regulations specifically provide
that the IRS will not challenge positions
taken by taxpayers that apply the rules
in the proposed regulations. The
proposed regulations and these
regulations are consistent with the
existing statute. Accordingly, the IRS
will not challenge return positions
consistent with the proposed
regulations, as clarified in these final
regulations, for the period prior to the
effective/applicability date of these final
regulations.
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Availability of IRS Documents
For copies of recently issued Revenue
Procedures, Revenue Rulings, notices,
and other guidance published in the
Internal Revenue Bulletin, please visit
the IRS Web site at https://www.irs.gov.
Special Analyses
Certain IRS regulations, including this
one, are exempt from the requirements
of Executive Order 12866, as
supplemented and reaffirmed by
Executive Order 13563. Therefore, a
regulatory impact 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, and
because the regulations do not impose a
collection of information on small
entities, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
these regulations have been submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for
comment on its impact on small
business, and no comments were
received.
Drafting Information
The principal authors of these
regulations are Frank J. Fisher and Amy
Chang, Office of the Associate Chief
Counsel (Passthroughs and Special
Industries). However, other personnel
from the Treasury Department and the
IRS participated in the development of
these regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.108–9 is added to
read as follows:
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■
§ 1.108–9 Application of the bankruptcy
and the insolvency provisions of section
108 to grantor trusts and disregarded
entities.
(a) General rule—(1) Owner is the
taxpayer. For purposes of applying
section 108(a)(1)(A) and (B) to discharge
of indebtedness income of a grantor
trust or a disregarded entity, neither the
grantor trust nor the disregarded entity
shall be considered to be the
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‘‘taxpayer,’’ as that term is used in
section 108(a)(1) and (d)(1) through (3).
Rather, for purposes of section
108(a)(1)(A) and (B) and (d)(1) through
(3) and subject to section 108(d)(6), the
owner of the grantor trust or the owner
of the disregarded entity is the
‘‘taxpayer.’’
(2) The bankruptcy exclusion. If
indebtedness of a grantor trust or a
disregarded entity is discharged in a
title 11 case, section 108(a)(1)(A) applies
to that discharged indebtedness only if
the owner of the grantor trust or the
owner of the disregarded entity is under
the jurisdiction of the court in a title 11
case as the title 11 debtor. If the grantor
trust or the disregarded entity is under
the jurisdiction of the court in a title 11
case as the title 11 debtor, but the owner
of the grantor trust or the owner of the
disregarded entity is not, section
108(a)(1)(A) does not apply to the
discharge of indebtedness income.
(3) The insolvency exclusion. Section
108(a)(1)(B) applies to the discharged
indebtedness of a grantor trust or a
disregarded entity only to the extent the
owner of the grantor trust or the owner
of the disregarded entity is insolvent. If
the grantor trust or the disregarded
entity is insolvent, but the owner of the
grantor trust or the owner of the
disregarded entity is solvent, section
108(a)(1)(B) does not apply to the
discharge of indebtedness income.
(b) Application to partnerships. Under
section 108(d)(6), in the case of a
partnership, section 108(a)(1)(A) and (B)
applies at the partner level. If a
partnership holds an interest in a
grantor trust or a disregarded entity, the
applicability of section 108(a)(1)(A) and
(B) to the discharge of indebtedness
income is tested by looking to each
partner to whom the income is
allocable.
(c) Definitions—(1) Disregarded
entity. For purposes of this section, a
disregarded entity is an entity that is
disregarded as an entity separate from
its owner for Federal income tax
purposes. See § 301.7701–2(c)(2)(i) of
this chapter, the Procedure and
Administration Regulations. Examples
of disregarded entities include a
domestic single-member limited
liability company that does not elect to
be classified as a corporation for Federal
income tax purposes pursuant to
§ 301.7701–3 of this chapter, a
corporation that is a qualified REIT
subsidiary (within the meaning of
section 856(i)(2)), and a corporation that
is a qualified subchapter S subsidiary
(within the meaning of section
1361(b)(3)(B)).
(2) Grantor trust. For purposes of this
section, a grantor trust is any portion of
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a trust that is treated under subpart E of
part I of subchapter J of chapter 1 of
subtitle A of title 26 of the United States
Code as being owned by the grantor or
another person.
(3) Owner. Notwithstanding any other
provision of this section to the contrary,
neither a grantor trust nor a disregarded
entity shall be considered an owner for
purposes of this section.
(4) Title 11 debtor. For purposes of
this section, a title 11 debtor is a debtor
in a case under title 11 of the United
States Code, as defined in 11 U.S.C.
101(13).
(d) Applicability date. The rules of
this section apply to discharge of
indebtedness income occurring on or
after June 10, 2016.
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
Approved: May 25, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2016–13779 Filed 6–9–16; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 100
[Docket No. USCG–2016–0463]
RIN 1625–AA08
Special Local Regulation; Midwest
Masters Sprints; Maumee River;
Toledo, OH
Coast Guard, DHS.
Temporary final rule.
AGENCY:
ACTION:
The Coast Guard is
establishing a temporary special local
regulation controlling movement of
vessels for certain waters of the Maumee
River. This action is necessary and is
intended to ensure safety of life on
navigable waters to be used for a rowing
event immediately prior to, during, and
immediately after this event. This
regulation requires vessels to maintain a
minimum speed for safe navigation and
maneuvering.
DATES: This temporary final rule is
effective from 5 a.m. until 2:30 p.m. on
June 11, 2016. For the purposes of
enforcement, actual notice will be used
on June 11, 2016.
ADDRESSES: To view documents
mentioned in this preamble as being
available in the docket, go to https://
www.regulations.gov, type USCG–2016–
SUMMARY:
E:\FR\FM\10JNR1.SGM
10JNR1
]]>Agencies
[Federal Register Volume 81, Number 112 (Friday, June 10, 2016)]
[Rules and Regulations]
[Pages 37504-37507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-13779]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9771]
RIN 1545-BJ14
Guidance Under Section 108(a) Concerning the Exclusion of Section
61(a)(12) Discharge of Indebtedness Income of a Grantor Trust or a
Disregarded Entity
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulation.
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SUMMARY: This document contains final regulations relating to the
exclusion from gross income of discharge of indebtedness income of a
grantor trust or an entity that is disregarded as an entity separate
from its owner. These final regulations provide rules regarding the
term ``taxpayer'' for purposes of applying the exclusion from gross
income of discharge of indebtedness income of a grantor trust or a
disregarded entity. These final regulations affect grantor trusts,
disregarded entities, and their owners.
DATES: Effective Date: These regulations are effective on June 10,
2016.
Applicability Date: These regulations apply to discharge of
indebtedness income occurring on or after June 10, 2016.
FOR FURTHER INFORMATION CONTACT: Frank J. Fisher or Amy Chang, (202)
317-6850 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These final regulations contain amendments to the Income Tax
Regulations (26 CFR part 1) under section 108 of the Internal Revenue
Code (Code). Section 61(a)(12) provides that income from the discharge
of indebtedness is includible in gross income. However, such income may
be excludable from gross income under section 108 in certain
circumstances. Section 108(a)(1)(A) and (B) exclude from gross income
any amount that would be includible in gross income by reason of the
discharge of indebtedness of the taxpayer if the discharge occurs in a
title 11 case or when the taxpayer is insolvent. Section 108(d)(1)
through (3) provide the meaning of the terms ``indebtedness of the
taxpayer,'' ``title 11 case,'' and ``insolvent,'' for purposes of
applying section 108, and each definition uses the term ``taxpayer.''
Section 7701(a)(14) defines ``taxpayer'' as any person subject to any
internal revenue tax.
On April 13, 2011, the Treasury Department and the IRS published in
the Federal Register (76 FR 20593) a notice of proposed rulemaking
(REG-154159-09) (the proposed regulations) to provide rules under
section 108(a) regarding the term ``taxpayer'' for purposes of applying
section 108 to the discharge of indebtedness income of a grantor trust
or an entity that is disregarded as an entity separate from its owner
(disregarded entity). The proposed regulations provide that, for
purposes of applying section 108(a)(1)(A) and (B) to the discharge of
indebtedness income of a grantor trust or a disregarded entity, the
term ``taxpayer,'' as used in section 108(a)(1) and (d)(1) through (3),
refers to the owner of the grantor trust or the disregarded entity. The
proposed regulations also provide that, in the case of a partnership,
the owner rules apply at the partner level to the partners to whom the
discharge of indebtedness is allocable. For example, if a partnership
holds an interest in a grantor trust or a disregarded entity, the
applicability of section 108(a)(1)(A) and (B) to the discharge of
indebtedness income is tested by looking to each partner to whom the
income is allocable. Lastly, the proposed regulations clarify that,
subject to the special rule for partnerships under section 108(d)(6),
the insolvency exclusion is available only if the owner is insolvent
and the bankruptcy exclusion is available only if the owner is under
the bankruptcy court's jurisdiction.
The Treasury Department and the IRS received written comments
responding to the notice of proposed rulemaking. The comments are
available for public inspection at www.regulations.gov. No public
hearing was requested or held. The comments are discussed in this
preamble.
Summary of Comments and Explanation of Revisions
After consideration of all the comments, the final regulations
adopt the proposed regulations as modified by this Treasury decision.
The purpose and scope of the proposed regulations and these final
regulations are primarily limited to defining the term ``taxpayer'' for
purposes of applying the bankruptcy and the insolvency exclusions from
[[Page 37505]]
gross income, under section 108(a)(1)(A) and (B), to the discharge of
indebtedness income of a grantor trust or a disregarded entity. These
final regulations are not intended to address section 108 in general
and are not intended to address liabilities in general.
1. Other Exclusions Under Section 108(a)
Two commenters recommended that the final regulations apply the
provisions of the proposed regulations to all exclusions in section
108(a), not only to the bankruptcy and the insolvency exclusions.
Guidance on the other exclusions in section 108(a) is beyond the scope
of these regulations.
2. Whether, Under Section 108(d)(2), the Owner Is ``Under the
Jurisdiction'' of the Court in a Title 11 Case
Section 108(a)(1)(A) provides, in part, that gross income does not
include any amount which would be includible in gross income by reason
of the discharge of the indebtedness of the taxpayer if the discharge
occurs in a title 11 case. Section 108(d)(2) defines ``title 11 case''
as a case under title 11 of the United States Code (relating to
bankruptcy), but only if the taxpayer is under the jurisdiction of the
court in such case and the discharge of indebtedness is granted by the
court or is pursuant to a plan approved by the court.
Consistent with the proposed regulations, these regulations provide
that the bankruptcy exclusion is available only if the owner of the
grantor trust or the owner of the disregarded entity is under the
jurisdiction of the court in a title 11 case. It is insufficient for
the grantor trust or the disregarded entity to be under the
jurisdiction of the court in a title 11 case. These regulations further
clarify that the owner of the grantor trust or the owner of the
disregarded entity must be under the jurisdiction of the court in a
title 11 case of that owner as the ``debtor,'' as that term is defined
in title 11 of the United States Code (the title 11 debtor).
The commenters suggested that section 108(d)(2) does not require
that the taxpayer be a title 11 debtor to be considered under the
jurisdiction of the court in a title 11 case. One commenter recommended
that an owner of a grantor trust or a disregarded entity be considered
under the jurisdiction of the court in a title 11 case when that owner
is indirectly liable for the debt of the grantor trust or the
disregarded entity and the court in a title 11 case eliminates the
owner's liability in conjunction with the cancellation of the debt of
the grantor trust or disregarded entity. Another commenter recommended
that an owner of a grantor trust or a disregarded entity be considered
under the jurisdiction of the court in a title 11 case when either the
owner has taken affirmative actions, such as filing a proof of claim or
a proof of interest, that place the owner under the court's
jurisdiction in a title 11 case, or the court otherwise asserts
jurisdiction over the owner in connection with a title 11 case. A third
commenter recommended that the owner of a disregarded entity be
considered under the jurisdiction of the court in a title 11 case when:
(1) The court asserts jurisdiction over that owner during the title 11
proceeding of the disregarded entity; (2) the owner's liability on the
discharged debt had been previously established (by contract or
otherwise); (3) the owner is liable for all, or substantially all, of
the discharged debt; and (4) qualifying for the bankruptcy exclusion
was not a principal purpose of the owner's undertaking of such
liability.
The Treasury Department and the IRS have not adopted these
recommendations because extending the bankruptcy exclusion to the owner
of a grantor trust or a disregarded entity when that owner is not
itself in bankruptcy would be inconsistent with the intended purpose of
section 108(a)(1)(A), as reflected in the legislative history of that
provision. Congress added the bankruptcy exclusion to the Code to allow
insolvent debtors a ``fresh start'' after they have liquidated their
assets to pay off creditors. S. Rep. No. 1035, 96th Cong., 2d Sess. 9-
10 (1980), 1980-2 CB 620, 624, provides:
The rules of the [Bankruptcy Tax Act of 1980, Public Law 96-589,
94 Stat. 3389 (1980)] concerning income tax treatment of debt
discharge in bankruptcy are intended to accommodate bankruptcy
policy and tax policy. To preserve the debtor's ``fresh start''
after bankruptcy, the bill provides that no income is recognized by
reason of debt discharge in bankruptcy, so that a debtor coming out
of bankruptcy (or an insolvent debtor outside bankruptcy) is not
burdened with an immediate tax liability.
Here, Congress was referring to ``debtor'' as that term is defined in
title 11. See 11 U.S.C. 101(12) (1980) (defining ``debtor'' as a person
or municipality concerning which a case under title 11 has been
commenced).
The Bankruptcy Tax Act of 1980 was enacted to supplement the
Bankruptcy Reform Act of 1978, Public Law 95-598, 92 Stat. 2549 (1978).
See S. Rep. No. 1035, 96th Cong., 2d Sess. 9 (1980), 1980-2 CB 620,
624. As indicated in the legislative history of the Bankruptcy Reform
Act of 1978, the debtor's ``fresh start'' is conditioned upon the
debtor committing all of its nonexempt assets to the jurisdiction of
the bankruptcy court, either for sale by the trustee or to determine an
appropriate plan to repay creditors. See H.R. Rep. No. 595, 95th Cong.,
1st Sess. 118, 125-26, 176 (1977). Congress did not intend that a
solvent, non-debtor owner of a grantor trust or a disregarded entity,
which has committed some but not all of its nonexempt assets to the
bankruptcy court's jurisdiction, have an exclusion from discharge of
indebtedness income merely by virtue of having some of its assets
subject to the jurisdiction of the bankruptcy court.
The commenters' recommendations are thus inconsistent with the
Congressional intent underlying the Bankruptcy Tax Act of 1980 because
those recommendations would provide a non-debtor owner that conducts
only some of its activities through the grantor trust or disregarded
entity with an unwarranted benefit when that owner is not a title 11
debtor and is able to pay its tax liability.
Accordingly, these regulations clarify that the owner of the
grantor trust or disregarded entity must itself be under the
jurisdiction of the court in a title 11 case as the title 11 debtor to
qualify for the bankruptcy exclusion.
3. The Gracia Cases and the Application of the Bankruptcy Exclusion at
the Partner Level
A commenter noted uncertainty under existing law as to whether the
holding in certain case law would be followed by the IRS. See Gracia v.
Commissioner, T.C. Memo. 2004-147; Mirarchi v. Commissioner, T.C. Memo.
2004-148; Price v. Commissioner, T.C. Memo. 2004-149; Estate of
Martinez v. Commissioner, T.C. Memo. 2004-150 (collectively, the Gracia
Cases). Because the bankruptcy court had asserted jurisdiction over
non-debtor partners for certain matters, the Tax Court in the Gracia
Cases upheld the application of the bankruptcy exclusion to the
partners of a partnership that was a title 11 debtor, despite the fact
that the partners were not title 11 debtors. The IRS's position is that
the Gracia Cases failed to interpret correctly the limited scope of
section 108(a)(1)(A), which applies only to partners that are also
title 11 debtors. See Action on Decision 2015-01 (2015-6 IRB 579)
(nonacquiescence in the Gracia Cases).
These regulations provide that, in the case of a partnership that
holds an interest in a grantor trust or a disregarded entity, the owner
rules
[[Page 37506]]
apply at the level of the partners to whom the income is allocable.
These regulations provide that the owner must be under the jurisdiction
of the court in a title 11 case as the title 11 debtor to qualify for
the bankruptcy exclusion. Accordingly, when the owner of the grantor
trust or disregarded entity is a partnership, the partner to whom the
income is allocable must be under the jurisdiction of the court in a
title 11 case of that partner as the title 11 debtor to qualify for the
bankruptcy exclusion.
4. Whether a Grantor Trust Can Be a Debtor in a Title 11 Case
One commenter noted that a trust cannot generally be a debtor in a
title 11 case. On the other hand, a business trust can be a debtor in a
title 11 case but is generally treated as a business entity for both
bankruptcy and Federal tax purposes. As such, the commenter noted
uncertainty as to whether these regulations concerning the bankruptcy
exclusion could ever apply to the bankruptcy of a grantor trust.
These regulations account for the possibility that a trust that is
treated as a grantor trust for Federal tax purposes may be treated as a
business trust for purposes of eligibility to be a debtor in a title 11
case. To provide comprehensive guidance, the Treasury Department and
the IRS have retained references in these regulations to grantor trusts
in the provisions concerning the bankruptcy exclusion.
5. Multiple-Owner Grantor Trusts
A grantor trust is any portion of a trust that is treated, under
subpart E of part I of subchapter J of chapter 1, as being owned by a
grantor or another person. One commenter recommended that future
guidance specify how a grantor's share of a multiple-owner grantor
trust's liability should be determined for purposes of determining
insolvency under section 108(d)(3). Specifically, that commenter
recommended that future guidance or tax forms provide that a grantor
trust is required to report the owner's share of the trust's
liabilities. These regulations do not address these issues but the
Treasury Department and the IRS invite comments regarding the
application of section 108(d)(3) to the owners of a multiple-owner
grantor trust. Submissions should be submitted to:
In the case of submissions to the IRS submitted by U.S. Mail:
Internal Revenue Service, Attn: Frank J. Fisher, CC:PSI:1, P.O. Box
7604, Ben Franklin Station, Washington, DC 20044.
In the case of submissions to the IRS submitted by a private
delivery service: Internal Revenue Service, Attn: Frank J. Fisher,
CC:PSI:1, 1111 Constitution Ave. NW., Washington, DC 20224.
6. Extent to Which Indebtedness of a Grantor Trust or a Disregarded
Entity Is Treated as Indebtedness of the Owner, Whether Indebtedness Is
Recourse or Nonrecourse Debt of the Owner, and the Effect on Insolvency
For purposes of section 108, section 108(d)(1) defines the term
``indebtedness of the taxpayer'' as any indebtedness for which the
taxpayer is liable or subject to which the taxpayer holds property. One
commenter recommended that the final regulations clarify that, for
purposes of section 108(d)(1), indebtedness of a disregarded entity is
indebtedness of the owner. In addition, a commenter recommended that
the Treasury Department and the IRS clarify whether debt of a
disregarded entity should be treated as recourse or nonrecourse debt of
the owner for purposes of determining the amount of cancellation of
debt income realized by the owner. That commenter suggested that the
Treasury Department and the IRS issue guidance, in the form of an
example in a regulation or a revenue ruling, as to whether the
indebtedness of a grantor trust or a disregarded entity is recourse or
nonrecourse indebtedness of the owner.
In addition, commenters recommended approaches for determining the
extent to which liabilities of a grantor trust or a disregarded entity
are taken into account in measuring the owner's insolvency under
section 108(d)(3) for purposes of the insolvency exclusion under
section 108(a)(1)(B), including applying the principles of Revenue
Ruling 92-53 (1992-2 CB 48). For purposes of the insolvency exclusion,
section 108(d)(3) defines ``insolvency'' as the excess of liabilities
over the fair market value of assets. Revenue Ruling 92-53 provides
that the amount by which a nonrecourse debt exceeds the fair market
value of the property securing the debt (excess nonrecourse debt) is
taken into account in determining whether a taxpayer is insolvent
within the meaning of section 108(d)(3) only to the extent that the
excess nonrecourse debt is discharged.
Comprehensive guidance on these issues is beyond the scope of these
regulations. However, the Treasury Department and the IRS are of the
view that indebtedness of a grantor trust or a disregarded entity is
indebtedness of the owner for purposes of section 108(d)(1); assuming
the owner has not guaranteed the indebtedness and is not otherwise
liable for the indebtedness under applicable law, such indebtedness
should generally be treated as nonrecourse indebtedness for purposes of
applying the section 108(a)(1)(B) insolvency exclusion; and accordingly
the principles of Revenue Ruling 92-53 apply to determine the extent to
which such indebtedness is taken into account in determining the
owner's insolvency under section 108(d)(3). The Treasury Department and
the IRS continue to study these issues and anticipate publishing
additional guidance providing further clarification. Accordingly, the
Treasury Department and the IRS invite comments on these issues.
Submissions should be submitted to:
In the case of submissions to the IRS submitted by U.S. Mail:
Internal Revenue Service, Attn: Seoyeon Sharon Park, CC:ITA:5, P.O. Box
7604, Ben Franklin Station, Washington, DC 20044.
In the case of submissions to the IRS submitted by a private
delivery service: Internal Revenue Service, Attn: Seoyeon Sharon Park,
CC:ITA:5, 1111 Constitution Ave. NW., Washington, DC 20224.
7. Valuation Discounts for Purposes of Section 108(d)(3)
One commenter requested that the Treasury Department and the IRS
clarify whether valuation discounts, if applicable to the owner's
interest in a disregarded entity, could apply to the valuation of the
assets and liabilities held by a disregarded entity for purposes of
determining insolvency under section 108(d)(3). Guidance on this issue
is beyond the scope of these regulations.
8. Effective/Applicability Date
These final regulations apply to the discharge of indebtedness
income occurring on or after the date these final regulations are
published in the Federal Register.
Some commenters requested that the Treasury Department and the IRS
permit taxpayers to apply the final regulations retroactively to
taxable years for which the period of limitations remain open. Another
commenter requested that the final regulations specifically provide
that the IRS will not challenge positions taken by taxpayers that apply
the rules in the proposed regulations. The proposed regulations and
these regulations are consistent with the existing statute.
Accordingly, the IRS will not challenge return positions consistent
with the proposed regulations, as clarified in these final regulations,
for the period prior to the effective/applicability date of these final
regulations.
[[Page 37507]]
Availability of IRS Documents
For copies of recently issued Revenue Procedures, Revenue Rulings,
notices, and other guidance published in the Internal Revenue Bulletin,
please visit the IRS Web site at https://www.irs.gov.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory impact 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, and because the regulations do not impose a
collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the Code, these regulations have been submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business, and no comments were received.
Drafting Information
The principal authors of these regulations are Frank J. Fisher and
Amy Chang, Office of the Associate Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the Treasury
Department and the IRS participated in the development of these
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.108-9 is added to read as follows:
Sec. 1.108-9 Application of the bankruptcy and the insolvency
provisions of section 108 to grantor trusts and disregarded entities.
(a) General rule--(1) Owner is the taxpayer. For purposes of
applying section 108(a)(1)(A) and (B) to discharge of indebtedness
income of a grantor trust or a disregarded entity, neither the grantor
trust nor the disregarded entity shall be considered to be the
``taxpayer,'' as that term is used in section 108(a)(1) and (d)(1)
through (3). Rather, for purposes of section 108(a)(1)(A) and (B) and
(d)(1) through (3) and subject to section 108(d)(6), the owner of the
grantor trust or the owner of the disregarded entity is the
``taxpayer.''
(2) The bankruptcy exclusion. If indebtedness of a grantor trust or
a disregarded entity is discharged in a title 11 case, section
108(a)(1)(A) applies to that discharged indebtedness only if the owner
of the grantor trust or the owner of the disregarded entity is under
the jurisdiction of the court in a title 11 case as the title 11
debtor. If the grantor trust or the disregarded entity is under the
jurisdiction of the court in a title 11 case as the title 11 debtor,
but the owner of the grantor trust or the owner of the disregarded
entity is not, section 108(a)(1)(A) does not apply to the discharge of
indebtedness income.
(3) The insolvency exclusion. Section 108(a)(1)(B) applies to the
discharged indebtedness of a grantor trust or a disregarded entity only
to the extent the owner of the grantor trust or the owner of the
disregarded entity is insolvent. If the grantor trust or the
disregarded entity is insolvent, but the owner of the grantor trust or
the owner of the disregarded entity is solvent, section 108(a)(1)(B)
does not apply to the discharge of indebtedness income.
(b) Application to partnerships. Under section 108(d)(6), in the
case of a partnership, section 108(a)(1)(A) and (B) applies at the
partner level. If a partnership holds an interest in a grantor trust or
a disregarded entity, the applicability of section 108(a)(1)(A) and (B)
to the discharge of indebtedness income is tested by looking to each
partner to whom the income is allocable.
(c) Definitions--(1) Disregarded entity. For purposes of this
section, a disregarded entity is an entity that is disregarded as an
entity separate from its owner for Federal income tax purposes. See
Sec. 301.7701-2(c)(2)(i) of this chapter, the Procedure and
Administration Regulations. Examples of disregarded entities include a
domestic single-member limited liability company that does not elect to
be classified as a corporation for Federal income tax purposes pursuant
to Sec. 301.7701-3 of this chapter, a corporation that is a qualified
REIT subsidiary (within the meaning of section 856(i)(2)), and a
corporation that is a qualified subchapter S subsidiary (within the
meaning of section 1361(b)(3)(B)).
(2) Grantor trust. For purposes of this section, a grantor trust is
any portion of a trust that is treated under subpart E of part I of
subchapter J of chapter 1 of subtitle A of title 26 of the United
States Code as being owned by the grantor or another person.
(3) Owner. Notwithstanding any other provision of this section to
the contrary, neither a grantor trust nor a disregarded entity shall be
considered an owner for purposes of this section.
(4) Title 11 debtor. For purposes of this section, a title 11
debtor is a debtor in a case under title 11 of the United States Code,
as defined in 11 U.S.C. 101(13).
(d) Applicability date. The rules of this section apply to
discharge of indebtedness income occurring on or after June 10, 2016.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: May 25, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-13779 Filed 6-9-16; 8:45 am]
BILLING CODE 4830-01-P
