WashingtonTax Alert October 27, 2009 (Debt Restructuring)

Washington Tax Alert from Don Barnes, [email protected]
October 27, 2009

The American Recovery and Reinvestment Tax Act of 2009 added IRC § 108(i), which permits C corporations and other taxpayers engaged in a trade or business to elect to defer cancellation of indebtedness (COD) income until 2014, and then recognize the COD income ratably over five taxable years. This provision applies to COD income realized in 2009 and 2010.

A taxpayer that makes an IRC § 108(i) election may not use the bankruptcy or insolvency exclusions of IRC § 108(a)(1) with regard to COD income deferred under IRC § 108(i). IRC § 108(i)(5)(C). However, Rev. Proc. 2009-37 provides that a taxpayer may make a partial IRC § 108(i) election with respect to an acquired or cancelled debt instrument, and the taxpayer may make an IRC § 108(i) election for different amounts of COD income realized with respect to different debt instruments. See Rev. Proc. 2009-37, § 4.04.

Therefore, a taxpayer that realizes COD income in excess of the amount by which it is insolvent may elect to defer that excess amount of COD income under IRC § 108(i). Similarly, a taxpayer in a title 11 bankruptcy may elect under IRC § 108(i) to defer a portion of the COD income realized, and exclude from income the balance of the COD income under IRC § 108(a)(1)(A).

Rev. Proc. 2009-37 provides detailed rules regarding the procedures for making elections under IRC § 108(i). In addition, the revenue procedure allows taxpayers to make a protective IRC § 108(i) election if they believe a transaction does not result in the realization of COD income but it is later determined that COD income was realized.