The IRS issued final regulations on the rules to accelerate cancellation of debt (COD) income that taxpayers elected to defer over a five-year period when an applicable debt instrument was reacquired by the issuer or a related party in 2009 or 2010 (T.D. 9622 and T.D. 9623). An applicable debt instrument is one issued by a C corporation or any other person in connection with a trade or business that person conducts (Sec. 108(i)(3)).
These deferral rules were enacted by the American Recovery and Reinvestment Act of 2009, P.L. 111-5, to assist businesses having difficulties during the recession. Once an acceleration event occurs, however, taxpayers that elected to defer this income must recognize it. The regulations the IRS issued govern those accelerations.
T.D. 9622, which contains the rules that apply to C corporations, finalizes without any substantive changes temporary regulations (T.D. 9497) issued in 2010 (only a transitional rule that is no longer applicable has been removed), whereas T.D. 9623 finalizes temporary rules (T.D. 9498) that apply to S corporations and partnerships with some changes from the temporary regulations.
T.D. 9622 explains how C corporations accelerate the inclusion of deferred COD income and the deduction of deferred original issue discount (OID) income under Sec. 108(i)(5)(D) and how earnings and profits are calculated when the deferral is triggered. The rules on deferred OID deductions apply to all taxpayers, not just C corporations.
The regulations require acceleration of deferred COD income by corporations where the corporation:
- Changes its tax status;
- Ceases its corporate existence in a transaction to which Sec. 381(a) (corporate acquisition rules) does not apply; or
- Engages in a transaction that impairs its ability to pay the tax liability associated with the deferred COD income.
T.D. 9623 provides the rules for determining when S corporations and partnerships must accelerate the inclusion of deferred COD income and accelerate the deduction of deferred OID income. Changes made in the final regulations include adding an example to clarify how Sec. 108(i)(6) applies when partners must recognize deferred amounts under Sec. 752(b). The other change is to a section that excepts from the acceleration rules certain distributions to provide that the exception will not apply if the electing partnership has terminated.