Rules Unveiled on Acceleration of COD Income in Section 108(i) Structures

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IRS unveils major new guidance on a law allowing financially troubled companies to defer their taxable cancellation of indebtedness income in certain circumstances, providing that a requirement to accelerate that COD income only applies in cases where taxpayers have engaged in transactions that would impair their ability to pay the tax after the deferral period. IRS issues two sets of proposed and temporary rules under new tax code Section 108(i). The first set (REG-142800-09, T.D. 9497) addresses discharge of indebtedness and original issue discount issues for Subchapter C corporations, while the second set (REG-144762-09, T.D. 9498) deals with the treatment of partnerships and Subchapter S corporations under Section 108(i). The overall approach of the rules is to limit the circumstances under which taxpayers must accelerate COD inclusion to those in which the likelihood that the government can collect the tax following the deferral period is impaired, IRS says.

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