[Federal Register Volume 78, Number 128 (Wednesday, July 3, 2013)]
[Rules and Regulations]
[Pages 39973-39984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-15885]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9623]
RIN 1545-BI99


Application of Section 108(i) to Partnerships and S Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains final regulations relating to the 
application of section 108(i) of the Internal Revenue Code (Code) to 
partnerships and S corporations and provides rules regarding the 
deferral of discharge of indebtedness income and original issue 
discount deductions by a partnership or an S corporation with respect 
to reacquisitions of applicable debt instruments after December 31, 
2008, and before January 1, 2011. The regulations affect partnerships 
and S corporations with respect to reacquisitions of applicable debt 
instruments and their partners and shareholders.

DATES: Effective Date: These regulations are effective on July 2, 2013.
    Applicability Date: For dates of applicability, see Sec.  1.108(i)-
0(b).

FOR FURTHER INFORMATION CONTACT: Joseph R. Worst, Office of Associate 
Chief Counsel (Passthroughs and Special Industries), (202) 622-3070 
(not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in these regulations has 
been 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)-2(b)(3)(iv). Under Sec.  
1.108(i)-2(b)(3)(iv), when a partnership makes an election under 
section 108(i), one or more of the partners in the partnership may be 
required to provide certain information to the partnership so that the 
partnership can correctly determine each such partner's deferred 
section 752 amount with respect to an applicable debt instrument.
    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, Public Law 111-5 
(123 Stat. 338 (2009)), and generally provides for an elective deferral 
of cancellation of debt income (COD income) realized by a taxpayer from 
a reacquisition of an applicable debt instrument that occurs after 
December 31, 2008, and before January 1, 2011. COD income deferred 
under section 108(i) is included in gross income ratably over a five 
taxable-year period (inclusion period) beginning with the taxpayer's 
fourth or fifth taxable year following the taxable year of the 
reacquisition.
    When a debt instrument is issued (or treated as issued) as part of 
the reacquisition, some or all of any original issue discount (OID) 
expense accruing from the debt instrument in a taxable year prior to 
the first taxable year of the inclusion period may also be required to 
be deferred (deferred OID deduction). The aggregate amount of deferred 
OID deductions is limited to the amount of COD income deferred with 
respect to the applicable debt instrument for which the section 108(i) 
election is made, and the aggregate amount of deferred OID deductions 
is taken into account ratably over the inclusion period.
    In general, COD income deferred under section 108(i) and related 
deferred OID deductions with respect to an applicable debt instrument 
that have not been previously taken into account (deferred items) are 
accelerated and taken into account in the taxable year in which an 
acceleration event occurs.
    A section 108(i) election is irrevocable and, if a section 108(i) 
election is made, sections 108(a)(1)(A), (B), (C), and (D) do not apply 
to the COD income that is deferred under section 108(i). Section 
108(i)(7) authorizes the Secretary to prescribe regulations, rules, or 
other guidance as may be necessary or appropriate for purposes of 
applying section 108(i).
    In August 2009, the IRS and the Treasury Department issued Rev. 
Proc. 2009-37 (2009-36 IRB 309), which provides election procedures for 
taxpayers (including partnerships and S corporations) and other 
guidance under section 108(i). Partnerships and S corporations that 
make an election under section 108(i) (electing partnership or electing 
S corporation) must follow the election procedures and reporting 
requirements of Rev. Proc. 2009-37.
    Temporary regulations (TD 9498, 75 FR 49380) and a notice of 
proposed rulemaking (REG-144762-09, 75 FR 49427) (proposed regulations) 
cross-referencing the temporary regulations were published in the 
Federal Register on August 13, 2010. No public hearing was requested or 
held. However, written comments responding to the notice of proposed 
rulemaking were received from the public. These comments were 
considered and are available for public inspection at http://www.regulations.gov or upon request. After consideration of the 
comments, the proposed regulations are adopted as amended by this 
Treasury decision, and the corresponding temporary regulations are 
removed. The revisions are discussed in this preamble.

Summary of Comments and Explanation of Provisions

A. Partnership-Level Election

    Section 108(i)(5)(B)(iii) provides that in the case of a 
partnership, S corporation, or other passthrough entity that reacquires 
an applicable debt instrument, the election under section 108(i) shall 
be made by the partnership, S corporation, or other entity involved. 
One commenter suggested that the final regulations permit a partner in 
a partnership to make a section 108(i) election if the partnership does 
not make the election. The commenter reasoned that a partner-level 
election rule would align section 108(i) with section 108(d)(6), which 
generally applies the rules under section 108 at the partner level. 
Additionally, the commenter noted that a partner-level election would 
be beneficial when the partners who control the partnership have no 
interest in making a section

[[Page 39974]]

108(i) election, but a non-controlling partner does. Section 
108(i)(5)(B)(iii) is unambiguous as to permitting only a partnership to 
make the election and, therefore, the IRS and the Treasury Department 
do not adopt the commenter's suggestion in the final regulations.

B. Applicable Debt Instrument Safe Harbors

    Section 108(i) applies to the reacquisition of an ``applicable debt 
instrument,'' which is defined under section 108(i)(3)(A) as any debt 
instrument issued by a C corporation or any other person in connection 
with the conduct of a trade or business by such person. The statute 
does not define what ``in connection with the conduct of a trade or 
business'' means in this context. The proposed regulations do not 
explicitly define the phrase either but, rather, provide five safe 
harbors under which a debt instrument is deemed to be issued in 
connection with a partnership's or S corporation's conduct of a trade 
or business for purposes of section 108(i) (trade or business safe 
harbors). If none of the trade or business safe harbors apply, then the 
determination of whether a debt instrument is an applicable debt 
instrument is based on the facts and circumstances.
    One commenter recommended that the final regulations add an 
additional trade or business safe harbor providing that a debt 
instrument issued by a partnership to acquire or improve real property 
held for rental purposes is treated as issued in connection with a 
trade or business for purposes of section 108(i) if at least 30 percent 
of the total tax basis (without reduction for depreciation deductions) 
of the partnership's property is allocable to depreciable property. 
Section 167(a) provides that a depreciation deduction is allowed for 
the exhaustion, wear and tear (1) of property used in a trade or 
business or (2) of property held for the production of income. Thus, 
the fact that property is depreciable does not necessarily indicate 
that the property is used in a trade or business. The final 
regulations, therefore, do not adopt this comment.
    One of the trade or business safe harbors in the proposed 
regulations requires that the gross fair market value of the trade or 
business assets of the partnership that issued the debt instrument be 
at least 80 percent of the gross fair market value of that 
partnership's total assets on the date of issuance. The commenter also 
requested that, because many partnerships own interests in lower-tier 
partnerships, the final regulations should permit an upper-tier 
electing partnership to take into account its proportionate share of 
assets held through lower-tier partnerships in which the upper-tier 
electing partnership holds a significant percentage of the interests 
(for example, at least 20 percent) as part of its trade or business 
assets. After consideration of the comment, the IRS and the Treasury 
Department have decided to not adopt the comment in the final 
regulations because doing so would add undue complexity to the trade or 
business safe harbors. No inference should be drawn from the decision 
not to adopt the comments as to whether a partnership described in the 
comments is or is not engaged in a trade or business.

C. Deferred Section 752 Amount Rules

    Section 108(i)(6) provides that any decrease in a partner's share 
of partnership liabilities as a result of the discharge shall not be 
taken into account for purposes of section 752 at the time of the 
discharge to the extent it would cause the partner to recognize gain 
under section 731 (section 108(i)(6) deferral). The decrease in a 
partner's share of a partnership liability under section 752(b) 
resulting from the reacquisition of an applicable debt instrument that 
is not treated as a current distribution of money to the partner under 
section 752(b) by reason of the section 108(i)(6) deferral is referred 
to as a partner's ``deferred section 752 amount.'' Under the proposed 
regulations, a partner's deferred section 752 amount cannot exceed the 
partner's share of deferred COD income. The partner's deferred section 
752 amount is treated as a distribution of money to the partner under 
section 752(b) at the same time and, to the extent remaining, in the 
same amount as the partner recognizes the deferred COD income (the last 
sentence of section 108(i)(6)).
    Some commenters are unsure how to apply the last sentence of 
section 108(i)(6) during the inclusion period when a partner's deferred 
section 752 amount is less than the partner's deferred COD income. The 
final regulations clarify the last sentence of section 108(i)(6) by 
adding an example to illustrate that the deferred section 752 amount is 
treated as a deemed distribution under section 752(b) in a taxable year 
of the inclusion period to the extent that the deferred section 752 
amount (less any deferred section 752 amount that has already been 
treated as a deemed distribution under section 752(b) in a prior 
taxable year of the inclusion period) is equal to or less than the 
partner's deferred COD income that is recognized in such taxable year.

D. Acceleration Events

1. Bankruptcy Issues
    The proposed regulations provide that the deferred section 108(i) 
items are accelerated in the taxable year that includes the day before 
the day on which an electing partnership or S corporation files a 
petition in a Title 11 or similar case (filing acceleration rule). Some 
commenters questioned when this rule applies. The filing acceleration 
rule applies to partnerships and S corporations that make an election 
under section 108(i) before filing a petition in a Title 11 or similar 
case. Without this rule, the period of limitations on assessment under 
section 6501 may prevent the IRS from assessing tax on deferred COD 
income. The filing acceleration rule, however, does not apply to 
partnerships and S corporations that file a petition in a Title 11 or 
similar case before making an election under section 108(i).
    A commenter also suggested that the final regulations permit 
partnerships and S corporations that have made an election under 
section 108(i) after filing bankruptcy to reorganize, recapitalize, or 
liquidate in bankruptcy without triggering acceleration of the deferred 
items under section 108(i). The commenter explained that a bankruptcy 
reorganization will in many cases cause an acceleration of the deferred 
items under section 108(i) because the bankrupt partnerships or S 
corporations may sell, exchange or transfer substantially all of their 
assets or liquidate as part of the reorganization. The IRS and the 
Treasury Department do not adopt this comment because the same 
acceleration events that apply to partnerships and S corporations that 
do not file bankruptcy should apply to partnerships and S corporations 
that make an election under section 108(i) after filing bankruptcy.
2. Calculation of ``Substantially All'' of the Assets
    The proposed regulations provide that a sale, exchange, transfer, 
or gift of ``substantially all'' of the assets of an electing 
partnership or S corporation triggers an acceleration of the deferred 
section 108(i) items. The proposed regulations provide that 
``substantially all'' of a partnership's or S corporation's assets 
means assets representing at least 90 percent of the fair market value 
of the net assets and at least 70 percent of the fair market value of 
the gross assets (90/70 test), as measured immediately prior

[[Page 39975]]

to the sale, exchange, transfer, or gift in question.
    One commenter advocated for a facts and circumstance test rather 
than the 90/70 test in determining whether a partnership or S 
corporation transfers substantially all of its assets for purposes of 
accelerating the deferred items under section 108(i). The IRS and the 
Treasury Department considered the comment but decided to retain the 
rule in the proposed regulations, because the 90/70 test provides 
electing partnerships and S corporations clear guidance on when a sale, 
exchange, transfer, or gift of their assets accelerates their deferred 
items.
3. Exceptions for Certain Distributions and Section 381 Transactions
    Section 1.108(i)-2(b)(6)(ii)(A) of the proposed regulations 
provides that when a direct or indirect partner of an electing 
partnership sells, exchanges, transfers (including contributions and 
distributions), or gifts all or a portion of its ``separate interest'' 
(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), its deferred items with respect to the separate interest 
are accelerated and must be taken into account.
    The proposed regulations provide an exception to this acceleration 
rule under Sec.  1.108(i)-2(b)(6)(iii)(E) for certain distributions of 
separate interests. Under Sec.  1.108(i)-2(b)(6)(iii)(E), if a 
partnership (upper-tier partnership) that is a direct or indirect 
partner of an electing partnership distributes its entire separate 
interest (distributed separate interest) to one or more of its partners 
(distributee partners) that have a share of the electing partnership's 
deferred items from the upper-tier partnership with respect to the 
distributed separate interest, the distributee partners' shares of the 
electing partnership's deferred items with respect to the distributed 
separate interest are not accelerated.
    The proposed regulations also provide an exception to the 
acceleration rule in Sec.  1.108(i)-2(b)(6)(ii)(A) for section 381 
transactions. Under Sec.  1.108(i)-2(b)(6)(iii)(F), a C corporation 
partner's share of an electing partnership's deferred items is not 
accelerated if, as part of a transaction described in Sec.  1.108(i)-
2(b)(6)(ii)(A), the assets of the C corporation partner are acquired by 
another C corporation in a transaction that is treated, under Sec.  
1.108(i)-1(b)(2)(ii)(B), as a transaction to which section 381(a) 
applies. An S corporation partner's share of an electing partnership's 
deferred items is not accelerated if, as part of a transaction 
described in Sec.  1.108(i)-2(b)(6)(ii)(A), the assets of the S 
corporation partner are acquired by another S corporation in a 
transaction to which section 381(a) applies.
    Since the publication of the proposed regulations, the IRS and the 
Treasury Department have considered whether the exceptions in Sec.  
1.108(i)-2(b)(6)(iii)(E) and Sec.  1.108(i)-2(b)(6)(iii)(F) should 
apply when the electing partnership terminates under section 
708(b)(1)(A). In that situation, the electing partnership no longer 
exists and cannot report any deferred items to its partners. Therefore, 
the final regulations clarify that the exceptions to acceleration for 
distributions of entire separate interests under Sec.  1.108(i)-
2(b)(6)(iii)(E) and for section 381 transactions under Sec.  1.108(i)-
2(b)(6)(iii)(F), do not apply if the electing partnership terminates 
under section 708(b)(1)(A).

E. Real Estate Investment Trusts

    Section 2.01 of Rev. Proc. 2009-37 provides that for purposes of 
section 108(i), real estate investment trusts (REITs) are not 
passthrough entities. One commenter recommended that, for purposes of 
clarity, the final regulations should reiterate the statement in Rev. 
Proc. 2009-37 that REITs are not passthrough entities for purposes of 
section 108(i).
    As stated in Rev. Proc. 2009-37, the IRS and the Treasury 
Department believe that REITs are not passthrough entities for purposes 
of section 108(i). However, the IRS and the Treasury Department do not 
believe it is necessary to add a rule in the final regulations to that 
effect because the issue is addressed in Rev. Proc. 2009-37.

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 the 
collection of information in these regulations will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that the collection of 
information imposed on partners of partnerships is minimal in that it 
requires partners to share information with partnerships that partners 
already maintain. Moreover, it should take a partner no more than one 
hour to satisfy the information-sharing requirement in these 
regulations. 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 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 author of these regulations is Joseph R. Worst of the 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, other personnel from the IRS and the 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 parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

Section 1.108(i)-2 also issued under 26 U.S.C. 108(i)(7). * * *

0
Par. 2. Section 1.108(i)-2 is added to read as follows:


Sec.  1.108(i)-2  Application of section 108(i) to partnerships and S 
corporations.

    (a) Overview. Under section 108(i), a partnership or an S 
corporation may elect to defer COD income arising in connection with a 
reacquisition of an applicable debt instrument for the deferral period. 
COD income deferred under section 108(i) is included in gross income 
ratably over the inclusion period, or earlier upon the occurrence of 
any acceleration event described in paragraph (b)(6) or (c)(3) of this 
section. If a debt instrument is 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

[[Page 39976]]

Sec.  1.108(i)-3(a), some or all of the deductions for OID with respect 
to such debt instrument must be deferred during the deferral period. 
The aggregate amount of OID deductions deferred during the deferral 
period is generally allowed as a deduction ratably over the inclusion 
period, or earlier upon the occurrence of any acceleration event 
described in paragraph (b)(6) or (c)(3) of this section. Paragraph (b) 
of this section provides rules that apply to partnerships. Paragraph 
(c) of this section provides rules that apply to S corporations. 
Paragraph (d) of this section provides general rules that apply to 
partnerships and S corporations. Paragraph (e) of this section provides 
election procedures and reporting requirements. Paragraph (f) of this 
section contains the effective/applicability date. See Sec.  1.108(i)-
0(a) for definitions that apply to this section.
    (b) Specific rules applicable to partnerships--(1) Allocation of 
COD income and partner's deferred amounts. An electing partnership that 
defers any portion of COD income realized from a reacquisition of an 
applicable debt instrument under section 108(i) must allocate all of 
the COD income with respect to the applicable debt instrument to its 
direct partners that are partners in the electing partnership 
immediately before the reacquisition in the manner in which the income 
would be included in the distributive shares of the partners under 
section 704 and the regulations under section 704, including Sec.  
1.704-1(b)(2)(iii), without regard to section 108(i). The electing 
partnership may determine, in any manner, the portion, if any, of a 
partner's COD income amount with respect to an applicable debt 
instrument that is the deferred amount, and the portion, if any, that 
is the included amount. However, no partner's deferred amount with 
respect to an applicable debt instrument may exceed that partner's COD 
income amount with respect to such applicable debt instrument, and the 
aggregate amount of the partners' COD income amounts and deferred 
amounts with respect to each applicable debt instrument must equal the 
electing partnership's COD income amount and deferred amount, 
respectively, with respect to each such applicable debt instrument.
    (2) Basis adjustments and capital account maintenance--(i) Basis 
adjustments. The adjusted basis of a partner's interest in a 
partnership is not increased under section 705(a)(1) by the partner's 
deferred amount in the taxable year of the reacquisition. The adjusted 
basis of a partner's interest in a partnership is not decreased under 
section 705(a)(2) by the partner's share of any deferred OID deduction 
in the taxable year in which the deferred OID accrues. The adjusted 
basis of a partner's interest in a partnership is adjusted under 
section 705(a) by the partner's share of the electing partnership's 
deferred items for the taxable year in which the partner takes into 
account such deferred items under this section.
    (ii) Capital account maintenance. For purposes of maintaining a 
partner's capital account under Sec.  1.704-1(b)(2)(iv) and 
notwithstanding Sec.  1.704-1(b)(2)(iv)(n), the capital account of a 
partner of a partnership is adjusted under Sec.  1.704-1(b)(2)(iv) for 
a partner's share of an electing partnership's deferred items as if no 
election under section 108(i) were made.
    (3) Deferred section 752 amount--(i) In general. An electing 
partnership shall determine, for each of its direct partners with a 
deferred amount, the partner's deferred section 752 amount, if any, 
with respect to an applicable debt instrument. A partner's deferred 
section 752 amount with respect to an applicable debt instrument equals 
the decrease in the partner's share of a partnership liability under 
section 752(b) resulting from the reacquisition of the applicable debt 
instrument that is not treated as a current distribution of money under 
section 752(b) by reason of section 108(i)(6) (deferred section 752 
amount). A partner's deferred section 752 amount is treated as a 
distribution of money by the partnership to the partner under section 
752(b) at the same time and, to the extent remaining, in the same 
amount as the partner recognizes the deferred amount with respect to 
the applicable debt instrument.
    (ii) Electing partnership's computation of a partner's deferred 
section 752 amount. To compute a partner's deferred section 752 amount, 
the electing partnership must first determine the amount of gain that 
its direct partner would recognize in the taxable year of a 
reacquisition under section 731 as a result of the reacquisition of one 
or more applicable debt instruments during the taxable year absent the 
deferral provided in the second sentence of section 108(i)(6) (the 
section 108(i)(6) deferral). If a direct partner of an electing 
partnership would not recognize any gain under section 731 as a result 
of the reacquisition of one or more applicable debt instruments during 
the taxable year absent the section 108(i)(6) deferral, the partner 
will not have a deferred section 752 amount with respect to any 
applicable debt instrument that is reacquired during the taxable year. 
If a direct partner of an electing partnership would recognize gain 
under section 731 as a result of the reacquisition of one or more 
applicable debt instruments during the taxable year absent the section 
108(i)(6) deferral, the partner's deferred section 752 amount for all 
applicable debt instruments that are reacquired during the taxable year 
is equal to the lesser of the partner's aggregate deferred amounts from 
the electing partnership for all applicable debt instruments reacquired 
during the taxable year, or the gain that the partner would recognize 
in the taxable year of the reacquisitions under section 731 as a result 
of the reacquisitions absent the section 108(i)(6) deferral. In 
determining the amount of gain that the direct partner would recognize 
in the taxable year of a reacquisition under section 731 as a result of 
the reacquisition of one or more applicable debt instruments during the 
taxable year absent the section 108(i)(6) deferral, the rule under 
Sec.  1.731-1(a)(1)(ii) applies to any deemed distribution of money 
under section 752(b) resulting from a decrease in the partner's share 
of a reacquired applicable debt instrument that is treated as an 
advance or drawing of money. The amount of any deemed distribution of 
money under section 752(b) resulting from a decrease in the partner's 
share of a reacquired applicable debt instrument that is treated as an 
advance or drawing of money under Sec.  1.731-1(a)(1)(ii) is determined 
as if no COD income resulting from the reacquisition of the applicable 
debt instrument is deferred under section 108(i).
    (iii) Multiple section 108(i) elections. If a direct partner of an 
electing partnership has a deferred section 752 amount under paragraph 
(b)(3)(ii) of this section for the taxable year of a reacquisition, and 
the partner has a deferred amount with respect to more than one 
applicable debt instrument from the electing partnership for which a 
section 108(i) election is made in that taxable year, the partner's 
deferred section 752 amount with respect to each such applicable debt 
instrument equals the partner's deferred section 752 amount as 
determined under paragraph (b)(3)(ii) of this section, multiplied by a 
ratio, the numerator of which is the partner's deferred amount with 
respect to such applicable debt instrument, and the denominator of 
which is the partner's aggregate deferred amounts from the electing 
partnership for all applicable debt instruments reacquired during the 
taxable year.
    (iv) Electing partnership's request for information. At the request 
of an electing partnership, each direct partner

[[Page 39977]]

of the electing partnership that has a deferred amount with respect to 
such partnership must provide to the electing partnership a written 
statement containing information requested by the partnership that is 
necessary to determine the partner's deferred section 752 amount (such 
as the partner's adjusted basis in the partner's interest in the 
electing partnership). The written statement must be signed under 
penalties of perjury and provided to the requesting partnership within 
30 days of the date of the request by the electing partnership.
    (v) Examples. The following examples illustrate the rules under 
paragraph (b)(3) of this section:

    Example 1.  (i) A and B each hold a 50 percent interest in 
Partnership, a calendar-year partnership. As of January 1, 2009, A 
and B each have an adjusted basis of $50 in their partnership 
interests. Partnership has two applicable debt instruments 
outstanding, debt one of $300 and debt two of $200. A and B share 
equally in the debt for section 752(b) purposes. On March 1, 2009, 
debt one is cancelled and Partnership realizes $300 of COD income. 
On December 1, 2009, debt two is cancelled and Partnership realizes 
$200 of COD income. The Partnership has no other income or loss 
items for 2009. A and B are each allocated $150 of COD income from 
debt one and $100 of COD income from debt two. Partnership makes an 
election under section 108(i) to defer $225 of the $300 of COD 
income realized from the reacquisition of debt one, $150 of which is 
A's deferred amount, and $75 of which is B's deferred amount. 
Partnership also makes an election under section 108(i) to defer 
$125 of the $200 of COD income realized from the reacquisition of 
debt two, $100 of which is A's deferred amount, and $25 of which is 
B's deferred amount. A has no included amount for either debt. B has 
an included amount of $75 with respect to debt one and an included 
amount of $75 with respect to debt two for 2009.
    (ii) Under paragraph (b)(3)(ii) of this section, the amount of 
gain that A would recognize under section 731 as a result of the 
reacquisitions absent the section 108(i)(6) deferral is $200. Thus, 
A's deferred section 752 amount with respect to debt one and debt 
two equals $200 (the lesser of A's aggregate deferred amounts with 
respect to debt one and debt two of $250, or gain that A would 
recognize under section 731 in 2009, as a result of the 
reacquisitions absent the section 108(i)(6) deferral, of $200). 
Under paragraph (b)(3)(iii) of this section, $120 of A's $200 
deferred section 752 amount relates to debt one ($200 x $150/$250) 
and $80 relates to debt two ($200 x $100/$250).
    (iii) Under paragraph (b)(3)(ii) of this section, the amount of 
gain that B would recognize under section 731 as a result of the 
reacquisitions absent the section 108(i)(6) deferral is $50. Thus, 
B's deferred section 752 amount with respect to debt one and debt 
two equals $50 (the lesser of B's aggregate deferred amounts with 
respect to debt one and debt two of $100, or gain that B would 
recognize under section 731 in 2009, as a result of the 
reacquisitions absent the section 108(i)(6) deferral, of $50). Under 
paragraph (b)(3)(iii) of this section, $37.50 of B's $50 deferred 
section 752 amount relates to debt one ($50 x $75/$100) and $12.50 
relates to debt two ($50 x $25/$100).
    (iv) A will recognize $50 of deferred COD income ($30 with 
respect to debt one and $20 with respect to debt two) in each of the 
five taxable years of the inclusion period, provided there are no 
earlier acceleration events under paragraph (b)(6) of this section. 
Under paragraph (b)(3)(i) of this section, A will be treated as 
receiving a $30 deemed distribution under section 752(b) with 
respect to debt one and a $20 deemed distribution with respect to 
debt two in each of the first, second, third, and fourth taxable 
years of the inclusion period. A will not have any remaining 
deferred section 752 amounts in the fifth taxable year of the 
inclusion period.
    (v) B will recognize $20 of deferred COD income ($15 with 
respect to debt one and $5 with respect to debt two) in each of the 
five taxable years of the inclusion period, provided there are no 
earlier acceleration events under paragraph (b)(6) of this section. 
Under paragraph (b)(3)(i) of this section, B will be treated as 
receiving a $15 deemed distribution under section 752(b) with 
respect to debt one and a $5 deemed distribution with respect to 
debt two in the first and second taxable year of the inclusion 
period, and a $7.50 deemed distribution under section 752(b) with 
respect to debt one ($10 x $15/$20) and a $2.50 deemed distribution 
with respect to debt two ($10 x $5/$20) in the third taxable year of 
the inclusion period. B will not have any remaining deferred section 
752 amounts in the fourth and fifth taxable years of the inclusion 
period.
    Example 2.  (i) The facts are the same as in Example 1, except 
that Partnership has gross income for the year (including the $500 
of COD income) of $700 and other separately stated losses of $500. 
A's and B's distributive share of each item is 50 percent.
    (ii) In determining the amount of gain that A would recognize 
under section 731 as a result of the reacquisitions absent the 
section 108(i)(6) deferral, Partnership first increases A's $50 
adjusted basis in his interest in Partnership by A's distributive 
share of Partnership income (other than the deferred amounts 
relating to debt one and debt two) of $100, and then decreases A's 
adjusted basis in Partnership by deemed distributions under section 
752(b) of $250 and, thereafter, by A's distributive share of 
Partnership losses of $250, but only to the extent that A's basis is 
not reduced below zero. Under paragraph (b)(3)(ii) of this section, 
the amount of gain that A would recognize under section 731 as a 
result of the reacquisitions absent section 108(i)(6) deferral is 
$100. Thus, A's deferred section 752 amount with respect to debt one 
and debt two equals $100 (the lesser of A's aggregate deferred 
amounts with respect to debt one and debt two of $250, or gain that 
A would recognize under section 731 as a result of the 
reacquisitions absent the deferral section 108(i)(6) deferral of 
$100). Under paragraph (b)(3)(iii) of this section, A's deferred 
section 752 amount with respect to debt one is $60 ($100 x $150/
$250), and A's deferred section 752 amount with respect to debt two 
is $40 ($100 x $100/$250). A's $250 of Partnership losses are 
suspended under section 704(d).
    (iii) In determining the amount of gain that B would recognize 
under section 731 as a result of the reacquisitions absent the 
section 108(i)(6) deferral, Partnership first increases B's $50 
adjusted basis in his interest in Partnership by B's distributive 
share of Partnership income (other than the deferred amounts 
relating to debt one and debt two) of $250 ($100 other income plus 
$150 included amount with respect to debt one and debt two), and 
then decreases B's adjusted basis in Partnership by deemed 
distributions under section 752(b) of $250 and, thereafter, by B's 
distributive share of Partnership losses of $250, but only to the 
extent that B's basis is not reduced below zero. Under paragraph 
(b)(3)(ii) of this section, B would not recognize any gain under 
section 731 as a result of the reacquisitions absent the section 
108(i)(6) deferral. Thus, B has no deferred section 752 amount with 
respect to either debt one or debt two. B may deduct his 
distributive share of Partnership losses to the extent of $50, with 
the remaining $200 suspended under section 704(d).
    (4) Tiered partnerships--(i) In general. If a partnership (upper-
tier partnership) is a direct or indirect partner of an electing 
partnership and directly or indirectly receives an allocation of a COD 
income amount from the electing partnership, all or a portion of which 
is deferred under section 108(i), the upper-tier partnership must 
allocate its COD income amount to its partners that are partners in the 
upper-tier partnership immediately before the reacquisition in the 
manner in which the income would be included in the distributive shares 
of the partners under section 704 and the regulations under section 
704, including Sec.  1.704-1(b)(2)(iii), without regard to section 
108(i). The upper-tier partnership may determine, in any manner, the 
portion, if any, of a partner's COD income amount with respect to an 
applicable debt instrument that is the deferred amount, and the 
portion, if any, that is the included amount. However, no partner's 
deferred amount with respect to an applicable debt instrument may 
exceed that partner's COD income amount with respect to such applicable 
debt instrument, and the aggregate amount of the partners' COD income 
amounts and deferred amounts with respect to each applicable debt 
instrument must equal the upper-tier partnership's COD income amount 
and deferred amount, respectively, with respect to each such applicable 
debt instrument.
    (ii) Deferred section 752 amount. The computation of a partner's 
deferred

[[Page 39978]]

section 752 amount, as described in paragraph (b)(3)(ii) of this 
section, is calculated only for direct partners of the electing 
partnership. An upper-tier partnership's deferred section 752 amount 
with respect to an applicable debt instrument of the electing 
partnership is allocated only to those partners of the upper-tier 
partnership that have a deferred amount with respect to that applicable 
debt instrument, and in proportion to such partners' share of the 
upper-tier partnership's deferred amount with respect to that 
applicable debt instrument. A partner's share of the upper-tier 
partnership's deferred section 752 amount with respect to an applicable 
debt instrument must not exceed that partner's share of the upper-tier 
partnership's deferred amount with respect to the applicable debt 
instrument to which the deferred section 752 amount relates. The 
deferred section 752 amount of a partner of an upper-tier partnership 
is treated as a distribution of money by the upper-tier partnership to 
the partner under section 752(b), at the same time and, to the extent 
remaining, in the same amount as the partner recognizes the deferred 
amount with respect to the applicable debt instrument.
    (iii) Examples. The following examples illustrate the rules under 
paragraph (b)(4) of this section:

    Example 1. (i) PRS, a calendar-year partnership, has two equal 
partners, A, an individual, and XYZ, a partnership. As of January 1, 
2009, A and XYZ each have an adjusted basis of $50 in their 
partnership interests. PRS has a $500 applicable debt instrument 
outstanding. On June 1, 2009, the creditor agrees to cancel the $500 
indebtedness. PRS realizes $500 of COD income as a result of the 
reacquisition. PRS has no other income or loss items for 2009. PRS 
makes an election under section 108(i) to defer $200 of the $500 of 
COD income. PRS allocates the $500 of COD income equally between its 
partners ($250 each). PRS determines that, for each partner, $100 of 
the COD income amount is the deferred amount, and $150 is the 
included amount. For 2009, each of A's and XYZ's share of the 
decrease in PRS's reacquired applicable debt instrument is $250.
    (ii) XYZ has two equal partners, individuals X and Y. X and Y 
share equally in XYZ's liabilities. XYZ allocates the $250 COD 
income amount from PRS equally between X and Y ($125 each). XYZ 
determines that X has a deferred amount of $100 and an included 
amount of $25. All $125 of Y's COD income amount is Y's included 
amount. For 2009, each of X's and Y's share of XYZ's $250 decrease 
in liability with respect to the reacquired applicable debt 
instrument of PRS is $125.
    (iii) Under paragraph (b)(3)(ii) of this section, PRS determines 
that XYZ has a deferred section 752 amount of $50. Therefore, for 
2009, of XYZ's $250 share of the decrease in PRS's reacquired 
applicable debt instrument, $200 is treated as a deemed distribution 
under section 752(b) and $50 is the deferred section 752 amount.
    (iv) Under paragraph (b)(4)(ii) of this section, none of XYZ's 
$50 deferred section 752 amount is allocated to Y because Y does not 
have a deferred amount with respect to the reacquired applicable 
debt interest. XYZ's entire $50 of deferred section 752 amount is 
allocated to X. Therefore, of X's $125 share of the XYZ's decrease 
in liability with respect to the reacquired applicable debt 
instrument of PRS, $75 is treated as a deemed distribution under 
section 752(b) and $50 is X's deferred section 752 amount. Y's $125 
share of XYZ's decrease in liability with respect to the reacquired 
applicable debt instrument of PRS is treated as a deemed 
distribution under section 752(b) and none is a deferred section 752 
amount.
    Example 2.  (i) The facts are the same as in Example 1, except 
for the following: XYZ has three partners, X, Y, and Z. The profits 
and losses of XYZ are shared 25 percent by X, 25 percent by Y, and 
50 percent by Z. XYZ allocates its $250 COD income amount from PRS 
$62.50 to each of X and Y, and $125 to Z. XYZ determines that X has 
a deferred amount of $50 and an included amount of $12.50, Y has a 
deferred amount of $0 and an included amount of $62.50, and Z has a 
deferred amount of $50 and an included amount of $75 with respect to 
the applicable debt instrument. X's, Y's, and Z's share of XYZ's 
decrease in liability with respect to the reacquired applicable debt 
instrument of PRS is $62.50, $62.50 and $125, respectively.
    (ii) Under paragraph (b)(4)(ii) of this section, none of XYZ's 
$50 deferred section 752 amount is allocated to Y because Y does not 
have a deferred amount with respect to the reacquired applicable 
debt instrument. XYZ's $50 deferred section 752 amount is allocated 
to X and Z in proportion to X's and Z's share of XYZ's deferred 
amount, or $25 each ($50 x ($50/$100)). Therefore, of X's $62.50 
share of XYZ's decrease in liability with respect to the reacquired 
applicable debt instrument, $37.50 is treated as a deemed 
distribution under section 752(b) and $25 is X's deferred section 
752 amount. All of Y's $62.50 share of XYZ's decrease in liability 
with respect to the reacquired applicable debt instrument is treated 
as a deemed distribution under section 752(b). Of Z's $125 share of 
XYZ's decrease in liability with respect to the reacquired 
applicable debt instrument, $100 is treated as a deemed distribution 
under section 752(b) and $25 is Z's deferred section 752 amount.
    (5) S corporation partner--(i) In general. If an S corporation 
partner has a deferred amount with respect to an applicable debt 
instrument of an electing partnership, such deferred amount is shared 
pro rata only among those shareholders that are shareholders of the S 
corporation partner immediately before the reacquisition of the 
applicable debt instrument.
    (ii) Basis adjustments. The adjusted basis of a shareholder's stock 
in an S corporation partner is not increased under section 1367(a)(1) 
by the shareholder's share of the S corporation partner's deferred 
amount in the taxable year of the reacquisition. The adjusted basis of 
a shareholder's stock in an S corporation partner is not decreased 
under section 1367(a)(2) by the shareholder's share of the S 
corporation partner's deferred OID deduction in the taxable year in 
which the deferred OID accrues. The adjusted basis of a shareholder's 
stock in an S corporation partner is adjusted under section 1367(a) by 
the shareholder's share of the S corporation partner's share of the 
electing partnership's deferred items for the taxable year in which the 
shareholder takes into account its share of such deferred items under 
this section.
    (iii) Accumulated adjustments account. The accumulated adjustments 
account (AAA), as defined in section 1368(e)(1), of an S corporation 
partner that has a deferred amount with respect to an applicable debt 
instrument of an electing partnership is not increased by its deferred 
amount in the taxable year of the reacquisition. The AAA of an S 
corporation partner is not decreased by its share of any deferred OID 
deduction in the taxable year in which the deferred OID accrues. The 
AAA of an S corporation partner is adjusted under section 1368(e) by a 
shareholder's share of the S corporation partner's share of the 
electing partnership's deferred items for the S period (as defined in 
section 1368(e)(2)) in which the shareholder of the S corporation 
partner takes into account its share of the deferred items under this 
section.
    (6) Acceleration of deferred items--(i) Electing partnership-level 
events
    (A) General rules. Except as provided in paragraph (b)(6)(iii) of 
this section, a direct or indirect partner's share of an electing 
partnership's deferred items is accelerated and must be taken into 
account by such partner--
    (1) In the taxable year in which the electing partnership 
liquidates;
    (2) In the taxable year in which the electing partnership sells, 
exchanges, transfers (including contributions and distributions), or 
gifts substantially all of its assets;
    (3) In the taxable year in which the electing partnership ceases 
doing business; or
    (4) In the taxable year that includes the day before the day on 
which the electing partnership files a petition in a Title 11 or 
similar case.
    (B) Substantially all requirement. For purposes of this paragraph 
(b)(6), substantially all of a partnership's assets means assets 
representing at least 90 percent of the fair market value of the

[[Page 39979]]

net assets, and at least 70 percent of the fair market value of the 
gross assets, held by the partnership immediately prior to the sale, 
exchange, transfer, or gift. For purposes of applying the rule in 
paragraph (b)(6)(i)(A)(2) of this section, a sale, exchange, transfer, 
or gift by any direct or indirect lower-tier partnership of the 
electing partnership (lower-tier partnership) of all or part of its 
assets is not treated as a sale, exchange, transfer, or gift of the 
assets of any partnership that holds, directly or indirectly, an 
interest in such lower-tier partnership. However, for purposes of 
applying the rule in paragraph (b)(6)(i)(A)(2) of this section, a sale, 
exchange, transfer, or gift of substantially all of the assets of a 
transferee partnership (as described in paragraph (b)(6)(iii)(A)(1) of 
this section), or of a lower-tier partnership that received assets of 
the electing partnership from a transferee partnership or another 
lower-tier partnership in a transaction governed all or in part by 
section 721, is treated as a sale, exchange, transfer, or gift by the 
holder of an interest in such transferee partnership or lower-tier 
partnership of its entire interest in that transferee partnership or 
lower-tier partnership.
    (ii) Direct or indirect partner-level events--(A) General rules. 
Except as provided in paragraph (b)(6)(iii) of this section, a direct 
or indirect partner's share of an electing partnership's deferred items 
with respect to a separate interest is accelerated and must be taken 
into account by such partner in the taxable year in which--
    (1) The partner dies or liquidates;
    (2) The partner sells, exchanges (including redemptions treated as 
exchanges under section 302), transfers (including contributions and 
distributions), or gifts (including transfers treated as gifts under 
section 1041) all or a portion of its separate interest;
    (3) The partner's separate interest is redeemed within the meaning 
of paragraph (b)(6)(ii)(B)(2) of this section; or
    (4) The partner abandons its separate interest.
    (B) Meaning of terms; special rules--(1) Partial transfers. For 
purposes of paragraph (b)(6)(ii)(A)(2) of this section, if a partner 
sells, exchanges (including redemptions treated as exchanges under 
section 302), transfers (including contributions and distributions), or 
gifts (including transfers treated as gifts under section 1041) a 
portion of its separate interest, such partner's share of the electing 
partnership's deferred items with respect to the separate interest 
proportionate to the separate interest sold, exchanged, transferred, or 
gifted is accelerated and must be taken into account by such partner.
    (2) Redemptions. For purposes of paragraph (b)(6)(ii)(A)(3) of this 
section, a partner's separate interest is redeemed if the partner 
receives a distribution of cash and/or property in complete liquidation 
of such separate interest.
    (3) S corporation partners. In addition to the rules in paragraphs 
(b)(6)(i) and (ii) of this section, an S corporation partner's share of 
the electing partnership's deferred items is accelerated and the 
shareholders of the S corporation partner must take into account their 
respective shares of the S corporation partner's share of the electing 
partnership's deferred items in the taxable year in which the S 
corporation partner's election under section 1362(a) terminates.
    (4) C corporation partners. In addition to the rules in paragraphs 
(b)(6)(i), (ii), and (iii) of this section, the acceleration rules in 
Sec.  1.108(i)-1(b) and the earnings and profits rules in Sec.  
1.108(i)-1(d) apply to partners that are electing corporations.
    (iii) Events not constituting acceleration. Notwithstanding the 
rules in paragraphs (b)(6)(i) and (ii) of this section, a direct or 
indirect partner's share of an electing partnership's deferred items 
with respect to a separate interest is not accelerated by any of the 
events described in this paragraph (b)(6)(iii).
    (A) Section 721 contributions--(1) Electing partnership 
contributions. A direct or indirect partner's share of an electing 
partnership's deferred items is not accelerated if the electing 
partnership contributes all or a portion of its assets in a transaction 
governed all or in part by section 721(a) to another partnership 
(transferee partnership) in exchange for an interest in the transferee 
partnership provided that the electing partnership does not terminate 
under section 708(b)(1)(A) or transfer its assets and liabilities in a 
transaction described in section 708(b)(2)(A) or section 708(b)(2)(B). 
See paragraph (b)(6)(iii)(D) of this section for transactions governed 
by section 708(b)(2)(A). Notwithstanding the rules in this paragraph 
(b)(6)(iii)(A)(1), the rules in paragraphs (b)(6)(i)(A) and 
(b)(6)(ii)(A) of this section apply to any part of the transaction to 
which section 721(a) does not apply.
    (2) Partner contributions. A direct or indirect partner's share of 
an electing partnership's deferred items with respect to a separate 
interest is not accelerated if the holder of such interest 
(contributing partner) contributes its entire separate interest 
(contributed separate interest) in a transaction governed all or in 
part by section 721(a) to another partnership (transferee partnership) 
in exchange for an interest in the transferee partnership provided that 
the partnership in which the separate interest is held does not 
terminate under section 708(b)(1)(A) or transfer its assets and 
liabilities in a transaction described in section 708(b)(2)(A) or 
section 708(b)(2)(B). See paragraph (b)(6)(iii)(D) of this section for 
transactions governed by section 708(b)(2)(A). The transferee 
partnership becomes subject to section 108(i), including all reporting 
requirements under this section, with respect to the contributing 
partner's share of the electing partnership's deferred items associated 
with the contributed separate interest. The transferee partnership must 
allocate and report the share of the electing partnership's deferred 
items that is associated with the contributed separate interest to the 
contributing partner to the same extent that such share of the electing 
partnership's deferred items would have been allocated and reported to 
the contributing partner in the absence of such contribution. 
Notwithstanding the rules in this paragraph (b)(6)(iii)(A)(2), the 
rules in paragraph (b)(6)(ii)(A) of this section apply to any part of 
the transaction to which section 721(a) does not apply.
    (B) Section 1031 exchanges. A direct or indirect partner's share of 
the electing partnership's deferred items is not accelerated if the 
electing partnership transfers property held for productive use in a 
trade or business or for investment in exchange for property of like 
kind which is to be held either for productive use in a trade or 
business or for investment in a transaction to which section 1031(a)(1) 
applies. Notwithstanding the rules in this paragraph (b)(6)(iii)(B), to 
the extent the electing partnership receives money or other property 
which does not meet the requirements of section 1031(a) (boot) in the 
exchange, a proportionate amount of the property transferred by the 
electing partnership equal to the proportion of the boot to the total 
consideration received in the exchange shall be treated as sold for 
purposes of paragraph (b)(6)(i)(A)(2) of this section.
    (C) Section 708(b)(1)(B) terminations. A direct or indirect 
partner's share of the deferred items of an electing partnership with 
respect to a separate interest is not accelerated if the electing 
partnership or a partnership that is a direct or indirect partner of 
the electing partnership terminates under section 708(b)(1)(B). 
Notwithstanding the rules in this paragraph (b)(6)(iii)(C), the rules

[[Page 39980]]

in paragraph (b)(6)(ii)(A) of this section apply to the event that 
causes the termination under section 708(b)(1)(B) to the extent not 
otherwise excepted under paragraph (b)(6)(iii) of this section.
    (D) Section 708(b)(2)(A) mergers or consolidations. A direct or 
indirect partner's share of the deferred items of an electing 
partnership with respect to a separate interest is not accelerated if 
the partnership in which the separate interest is held (the merger 
transaction partnership) merges into or consolidates with another 
partnership in a transaction to which section 708(b)(2)(A) applies. The 
resulting partnership or new partnership, as determined under Sec.  
1.708-1(c)(1), becomes subject to section 108(i), including all 
reporting requirements under this section, to the same extent that the 
merger transaction partnership was so subject prior to the transaction, 
and must allocate and report any merger transaction partnership's 
deferred items to the same extent and to the same partners that the 
merger transaction partnership allocated and reported such items prior 
to such transaction. Notwithstanding the rules in this paragraph 
(b)(6)(iii)(D), the rules in paragraphs (b)(6)(i)(A)(2) and 
(b)(6)(ii)(A)(2) of this section apply to that portion of the 
transaction that is treated as a sale, and the rules of 
(b)(6)(ii)(A)(3) apply if, as part of the transaction, the partner's 
separate interest is redeemed and the partner does not receive an 
interest in the resulting partnership with respect to such separate 
interest.
    (E) Certain distributions of separate interests. If a partnership 
(upper-tier partnership) that is a direct or indirect partner of an 
electing partnership distributes its entire separate interest 
(distributed separate interest) to one or more of its partners 
(distributee partners) that have a share of the electing partnership's 
deferred items from upper-tier partnership with respect to the 
distributed separate interest, the distributee partners' shares of the 
electing partnership's deferred items with respect to such distributed 
separate interest are not accelerated. The partnership, the separate 
interest in which was distributed, must allocate and report the share 
of the electing partnership's deferred items associated with the 
distributed separate interest only to such distributee partners that 
had a share of the electing partnership's deferred items from the 
upper-tier partnership with respect to the distributed separate 
interest prior to the distribution. This paragraph (b)(6)(iii)(E) does 
not apply if the electing partnership terminates under section 
708(b)(1)(A).
    (F) Section 381 transactions. A C corporation partner's share of an 
electing partnership's deferred items is not accelerated if, as part of 
a transaction described in paragraph (b)(6)(ii)(A) of this section, the 
assets of the C corporation partner are acquired by another C 
corporation (acquiring C corporation) in a transaction that is treated, 
under Sec.  1.108(i)-1(b)(2)(ii)(B), as a transaction to which section 
381(a) applies. An S corporation partner's share of an electing 
partnership's deferred items is not accelerated if, as part of a 
transaction described in paragraph (b)(6)(ii)(A) of this section, the 
assets of the S corporation partner are acquired by another S 
corporation (acquiring S corporation) in a transaction to which section 
381(a) applies. In such cases, the acquiring C corporation or acquiring 
S corporation, as the case may be, succeeds to the C corporation 
partner's or the S corporation partner's remaining share of the 
electing partnership's deferred items and becomes subject to section 
108(i), including all reporting requirements under this section, as if 
the acquiring C corporation or acquiring S corporation were the C 
corporation partner or the S corporation partner, respectively. The 
acquiring S corporation must allocate and report the S corporation 
partner's deferred items to the same extent as the S corporation 
partner would have been required to allocate and report those deferred 
items, and only to those shareholders of the S corporation partner who 
had a share of the S corporation partner's deferred items from the 
electing partnership prior to the transaction. This paragraph 
(b)(6)(iii)(F) does not apply if the electing partnership terminates 
under section 708(b)(1)(A).
    (G) Intercompany transfers. A C corporation partner's share of an 
electing partnership's deferred items is not accelerated if, as part of 
a transaction described in paragraph (b)(6)(ii)(A) of this section, the 
C corporation partner transfers its entire separate interest in an 
intercompany transaction, as described in Sec.  1.1502-13(b)(1)(i), and 
the electing partnership does not terminate under section 708(b)(1)(A) 
as a result of the intercompany transaction.
    (H) Retirement of a debt instrument. See Sec.  1.108(i)-3(c)(1) for 
rules regarding the retirement of a debt instrument that is subject to 
section 108(i).
    (I) Other non-acceleration events. A direct or indirect partner's 
share of an electing partnership's deferred items is not accelerated 
with respect to any transaction if the Commissioner makes a 
determination by published guidance that such transaction is not an 
acceleration event under the rules of this paragraph (b)(6).
    (iv) Related partnerships. A direct or indirect partner's share of 
a related partnership's deferred OID deduction (as determined in 
paragraph (d)(2) of this section) that has not previously been taken 
into account is accelerated and taken into account by the direct or 
indirect partner in the taxable year in which, and to the extent that, 
the deferred COD income to which the related partnership's deferred OID 
deduction relates is taken into account by the electing entity or its 
owners.
    (v) Examples. The following examples illustrate the rules under 
this paragraph (b)(6):
    Example 1. Meaning of ``separate interest.'' (i) Electing 
partnership (EP) has three partners, MT1, MT2, and UT, each of which 
is a partnership. The partners of MT1 are X and UT. The partners of 
MT2 are Y, UT, and B. The partners of UT are A, B, and C. In 
addition to their interests in the partnerships noted, MT1, MT2, and 
UT own other assets.
    (ii) Within the meaning of paragraph (a)(29) of Sec.  1.108(i)-
0, A and C each hold one separate interest (their interests in UT), 
B holds two separate interests (its interests in UT and MT2), UT 
holds three separate interests (its interests in MT1, MT2, and EP), 
MT1 and MT2 each hold one separate interest (their interests in EP), 
and X and Y each hold one separate interest (their interests in MT1 
and MT2, respectively) with respect to EP.
    Example 2. Distributions of separate interests in an electing 
partnership. (i) The facts are the same as in Example 1, except that 
A, as a direct partner of UT, has a share of EP's deferred items 
with respect to UT's interests in MT1 and EP. A does not have a 
share of EP's deferred items with respect to UT's interest in MT2. 
B, as a direct partner of UT, has a share of EP's deferred items 
with respect to UT's interest in MT1 and MT2, but not with respect 
to UT's interest in EP. B also has a share of EP's deferred items 
with respect to its separate interest in MT2. C does not have any 
share of EP's deferred items with respect to UT's interest in MT1, 
MT2, or EP.
    (ii) UT distributes 40 percent of its separate interest in MT1 
to A in redemption of A's interest in UT. Under paragraphs 
(b)(6)(ii)(A)(2) and (b)(6)(ii)(B)(1) of this section, a portion of 
UT's interest in MT1 has been transferred and a corresponding 
portion (40 percent) of UT's share of EP's deferred items from MT1 
is accelerated. Thus, 40 percent of A's and B's share of EP's 
deferred items from UT with respect to UT's interest in MT1 is 
accelerated. Further, because A's interest in UT is redeemed within 
the meaning of paragraph (b)(6)(ii)(B)(2) of this section, all of 
A's shares of EP's deferred items from UT are accelerated under 
paragraph (b)(6)(ii)(A)(3) of this section. UT continues to allocate 
and report to B its remaining share of EP's deferred items from

[[Page 39981]]

its separate interest in MT1 that was not distributed to A.
    (iii) UT distributes its entire separate interest in MT1 to B 
(other than in redemption of B's interest in UT). Under paragraph 
(b)(6)(ii)(A)(2) of this section, UT's share of EP's deferred items 
from MT1 would be accelerated. However, because UT distributes its 
entire separate interest in MT1 to B, B's share of EP's deferred 
items from UT with respect to UT's separate interest in MT1 is not 
accelerated under paragraph (b)(6)(iii)(E) of this section. MT1 
allocates and reports to B B's share of EP's deferred items from 
UT's separate interest in MT1 that was distributed to B.
    (iv) UT distributes its entire separate interest in MT1 to A and 
B (other than in redemption of their interests in UT). Under 
paragraph (b)(6)(iii)(E) of this section, none of A's or B's shares 
of EP's deferred items from UT with respect to UT's separate 
interest in MT1 is accelerated, and MT1 allocates and reports to A 
and B their respective share of EP's deferred items from UT's 
separate interest in MT1 that was distributed to A and B.
    Example 3. Partial sale of interest by an indirect partner. (i) 
Individual A holds a 50 percent partnership interest in UTP, a 
partnership that holds a 50 percent interest in EP, a partnership 
that makes an election to defer COD income under section 108(i). A's 
share of UTP's deferred amount with respect to EP's election under 
section 108(i) is $100. During a taxable year within the deferral 
period, A sells 25 percent of his partnership interest in UTP to an 
unrelated third party.
    (ii) Under paragraphs (b)(6)(ii)(A)(2) and (b)(6)(ii)(B)(1) of 
this section, 25 percent of A's $100 deferred amount is accelerated 
as a result of A's partial sale of his interest in UTP. Thus, A must 
recognize $25 of his deferred amount in the taxable year of the 
sale. A's remaining deferred amount is $75.
    Example 4. Section 708(b)(1)(B) termination of electing 
partnership. (i) A and B are equal partners in partnership AB. On 
January 1, 2009, AB reacquires an applicable debt instrument and 
makes an election under section 108(i) to defer $400 of COD income. 
A and B each have a deferred amount with respect to the applicable 
debt instrument of $200. On January 1, 2010, A sells its entire 50 
percent interest in AB to C in a transfer that terminates the 
partnership under section 708(b)(1)(B).
    (ii) Under paragraph (b)(6)(iii)(C) of this section, the 
technical termination of AB under section 708(b)(1)(B) does not 
cause A's or B's shares of AB's deferred items to be accelerated. 
However, A's $200 deferred amount is accelerated under paragraph 
(b)(6)(ii)(A)(2) of this section as a result of the sale.
    Example 5. Section 708(b)(2)(A) mergers. (i) A, B, and C are 
equal partners in partnership X, which has made an election under 
section 108(i) to defer $150 of COD income. The fair market value of 
each interest in partnership X is $100. A, B, and C each has a 
deferred amount of $50 with respect to partnership X's election 
under section 108(i). E, F, and G are partners in partnership Y. 
Partnership X and partnership Y merge in a taxable year during the 
deferral period of partnership X's election under section 108(i). 
Under section 708(b)(2)(A), the resulting partnership is considered 
a continuation of partnership Y and partnership X is considered 
terminated. Under state law, partnerships X and Y undertake the 
assets-over form of Sec.  1.708-1(c)(3)(i) to accomplish the merger. 
C does not want to become a partner in partnership Y, and 
partnership X does not have the resources to redeem C's interest 
before the merger. C, partnership X, and partnership Y enter into a 
merger agreement that satisfies the requirements of Sec.  1.708-
1(c)(4) and specifies that partnership Y will purchase C's interest 
in partnership X for $100 before the merger, and as part of the 
agreement, C consents to treat the transaction in a manner that is 
consistent with the agreement. As part of the merger, partnership X 
receives from partnership Y $100 (which will be distributed to C 
immediately before the merger), $100 (which will be distributed 
equally to A and B ($50 each)), and interests in partnership Y with 
a value of $100 (which will be distributed equally to A and B) in 
exchange for partnership X's assets and liabilities.
    (ii) Under the general rule of paragraph (b)(6)(iii)(D) of this 
section, and except as provided below, the deferred items of 
partnership X are not accelerated as a result of the merger with 
partnership Y. Partnership Y, the resulting partnership that is 
considered the continuation of partnership X, becomes subject to 
section 108(i), including all reporting requirements under section 
108(i), to the same extent that partnership X was subject to such 
rules. Under paragraph (b)(6)(iii)(D) of this section, partnership Y 
must allocate and report partnership X's deferred items to A and B 
in the same manner as partnership X had prior to the merger 
transaction.
    (iii) Under Sec.  1.708-1(c)(4), C is treated as selling its 
interest in partnership X immediately before the merger. As a 
result, C's $50 deferred amount is accelerated under paragraph 
(b)(6)(ii)(A)(2) of this section.
    (iv) Under section 707(a)(2)(B), partnership X is deemed to have 
sold a portion of its assets to partnership Y. Because partnership X 
is not treated as selling substantially all of its assets under 
paragraph (b)(6)(i)(B) of this section, A's and B's deferred amounts 
are not accelerated under paragraph (b)(6)(i)(A)(2) of this section.
    (v) Because A's and B's interests in partnership X are redeemed 
within the meaning of paragraph (b)(6)(ii)(B)(2) of this section, 
all of their shares of partnership X's deferred items would be 
accelerated under paragraph (b)(6)(ii)(A)(3). However, because they 
receive an interest in partnership Y in the merger, none of A's and 
B's share of partnership X's deferred items is accelerated.

    (7) Withholding under section 1446. See section 1446 regarding 
withholding by a partnership on a foreign partner's share of income 
effectively connected with a U.S. trade or business.
    (c) Specific rules applicable to S corporations--(1) Deferred COD 
income. An electing S corporation's COD income deferred under section 
108(i) (an S corporation's deferred COD income) is shared pro rata 
among those shareholders that are shareholders of the electing S 
corporation immediately before the reacquisition of the applicable debt 
instrument. Any COD income deferred under section 108(i) is taken into 
account under section 1366(a) by those shareholders in the inclusion 
period, or earlier upon the occurrence of an acceleration event 
described in paragraph (c)(3) of this section.
    (2) Basis adjustments and accumulated adjustments account--(i) 
Basis adjustments. The adjusted basis of a shareholder's stock in an 
electing S corporation is not increased under section 1367(a)(1) by the 
shareholder's share of the S corporation's deferred COD income in the 
taxable year of the reacquisition. The adjusted basis of a 
shareholder's stock in an electing S corporation or a related S 
corporation is not decreased under section 1367(a)(2) by the 
shareholder's share of the S corporation's deferred OID deduction in 
the taxable year in which the deferred OID accrues. The adjusted basis 
of a shareholder's stock in an electing S corporation or a related S 
corporation is adjusted under section 1367(a) by the shareholder's 
share of the S corporation's deferred items for the taxable year in 
which the shareholder takes into account its share of the deferred 
items under this section.
    (ii) Accumulated adjustments account. The AAA of an electing S 
corporation is not increased by the S corporation's deferred COD income 
in the taxable year of a reacquisition. The AAA of an electing S 
corporation or a related S corporation is not decreased by the S 
corporation's deferred OID deduction in the taxable year in which the 
deferred OID accrues. The AAA of an electing S corporation or a related 
S corporation is adjusted under section 1368(e) by a shareholder's 
share of the S corporation's deferred items for the S period (as 
defined in section 1368(e)(2)) in which a shareholder of the S 
corporation takes into account its share of the deferred items under 
this section.
    (3) Acceleration of deferred items--(i) Electing S corporation-
level events--(A) General rules. Except as provided in paragraph 
(c)(3)(iii) of this section, a shareholder's share of an electing S 
corporation's deferred items is accelerated and must be taken into 
account by such shareholder--
    (1) In the taxable year in which the electing S corporation 
liquidates;
    (2) In the taxable year in which the electing S corporation sells, 
exchanges, transfers (including contributions and

[[Page 39982]]

distributions), or gifts substantially all of its assets;
    (3) In the taxable year in which the electing S corporation ceases 
doing business;
    (4) In the taxable year in which the electing S corporation's 
election under section 1362(a) terminates; or
    (5) In the taxable year that includes the day before the day on 
which the electing S corporation files a petition in a Title 11 or 
similar case.
    (B) Substantially all requirement. For purposes of this paragraph 
(c)(3), substantially all of an electing S corporation's or 
partnership's assets means assets representing at least 90 percent of 
the fair market value of the net assets, and at least 70 percent of the 
fair market value of the gross assets, held by the S corporation or 
partnership immediately prior to the sale, exchange, transfer, or gift. 
For purposes of applying the rule in paragraph (c)(3)(i)(A)(2) of this 
section, a sale, exchange, transfer, or gift by any direct or indirect 
lower-tier partnership of the electing S corporation (lower-tier 
partnership) of all or part of its assets is not treated as a sale, 
exchange, transfer, or gift of the assets of any person that holds, 
directly or indirectly, an interest in such lower-tier partnership. 
However, for purposes of applying the rule in paragraph (c)(3)(i)(A)(2) 
of this section, a sale, exchange, transfer, or gift of substantially 
all of the assets of a transferee partnership (as described in 
paragraph (c)(3)(iii)(A) of this section), or of a lower-tier 
partnership that received assets of the electing S corporation from a 
transferee partnership of the electing S corporation or another lower-
tier partnership in a transaction governed all or in part by section 
721, is treated as a sale, exchange, transfer, or gift by the holder of 
an interest in such transferee partnership or lower-tier partnership of 
its entire interest in that transferee partnership or lower-tier 
partnership.
    (ii) Shareholder events--(A) General rules. Except as provided in 
paragraph (c)(3)(iii) of this section, a shareholder's share of an 
electing S corporation's deferred items is accelerated and must be 
taken into account by such shareholder in the taxable year in which--
    (1) The shareholder dies;
    (2) The shareholder sells, exchanges (including redemptions treated 
as exchanges under section 302), transfers (including contributions and 
distributions), or gifts (including transfers treated as gifts under 
section 1041) all or a portion of its interest in the electing S 
corporation; or
    (3) The shareholder abandons its interest in the electing S 
corporation.
    (B) Partial transfers. For purposes of paragraph (c)(3)(ii)(A)(2) 
of this section, if a shareholder of an electing S corporation sells, 
exchanges (including redemptions treated as exchanges under section 
302), transfers (including contributions or distributions), or gifts 
(including transfers treated as gifts under section 1041) a portion of 
its interest in the electing S corporation, such shareholder's share of 
the electing S corporation's deferred items proportionate to the 
interest that was sold, exchanged, transferred, or gifted is 
accelerated and must be taken into account by such shareholder.
    (iii) Events not constituting acceleration. Notwithstanding the 
rules in paragraphs (c)(3)(i) and (ii) of this section, a shareholder's 
share of an electing S corporation's deferred items is not accelerated 
by any of the events described in this paragraph (c)(3)(iii).
    (A) Electing S corporation's contributions. A shareholder's share 
of an electing S corporation's deferred items is not accelerated if the 
electing S corporation contributes all or a portion of its assets in a 
transaction governed all or in part by section 721(a) to a partnership 
(transferee partnership) in exchange for an interest in the transferee 
partnership. Notwithstanding the rules in this paragraph 
(c)(3)(iii)(A), the rules in paragraph (c)(3)(i)(A) of this section 
apply to any part of the transaction to which section 721(a) does not 
apply.
    (B) Section 1031 exchanges. A shareholder's share of an electing S 
corporation's deferred items is not accelerated if the electing S 
corporation transfers property held for productive use in a trade or 
business or for investment in exchange for property of like kind which 
is to be held either for productive use in a trade or business or for 
investment in a transaction to which section 1031(a)(1) applies. 
Notwithstanding the rules in this paragraph (c)(3)(iii)(B), to the 
extent the electing S corporation receives money or other property 
which does not meet the requirements of section 1031(a) (boot) in the 
exchange, a proportionate amount of the property transferred by the 
electing S corporation equal to the proportion of the boot to the total 
consideration received in the exchange shall be treated as sold for 
purposes of paragraph (c)(3)(i)(A)(2) of this section.
    (C) Section 381 transactions. A shareholder's share of an electing 
S corporation's deferred items is not accelerated if, as part of a 
transaction described in paragraph (c)(3)(i)(A) of this section, the 
electing S corporation's assets are acquired by another S corporation 
(acquiring S corporation) in a transaction to which section 381(a) 
applies. In such a case, the acquiring S corporation succeeds to the 
electing S corporation's remaining deferred items and becomes subject 
to section 108(i), including all reporting requirements under this 
section, as if the acquiring S corporation were the electing S 
corporation. The acquiring S corporation must allocate and report the 
electing S corporation's deferred items to the same extent that the 
electing S corporation would have been required to allocate and report 
those deferred items, and only to those shareholders who had a share of 
the electing S corporation's deferred items prior to the transaction.
    (D) Retirement of a debt instrument. See Sec.  1.108(i)-3(c)(1) for 
rules regarding the retirement of a debt instrument that is subject to 
section 108(i).
    (E) Other non-acceleration events. A shareholder's share of an 
electing S corporation's deferred items is not accelerated with respect 
to any transaction if the Commissioner makes a determination by 
published guidance that such transaction is not an acceleration event 
under the rules of this paragraph (c)(3).
    (iv) Related S corporations. A shareholder's share of a related S 
corporation's deferred OID deduction (as determined in paragraph (d)(2) 
of this section) that has not previously been taken into account is 
accelerated and taken into account by the shareholder in the taxable 
year in which, and to the extent that, deferred COD income to which the 
related S corporation's deferred OID deduction relates is taken into 
account by the electing entity or its owners.
    (d) General rules applicable to partnerships and S corporations--
(1) Applicable debt instrument (trade or business requirement). The 
determination of whether a debt instrument issued by a partnership or 
an S corporation is treated as a debt instrument issued in connection 
with the conduct of a trade or business by the partnership or S 
corporation for purposes of this section is based on all the facts and 
circumstances. However, a debt instrument issued by a partnership or an 
S corporation shall be treated as an applicable debt instrument for 
purposes of this section if the electing partnership or electing S 
corporation can establish that--
    (i) The gross fair market value of the trade or business assets of 
the partnership or S corporation that issued the debt instrument 
represented at least 80 percent of the gross fair market value

[[Page 39983]]

of that partnership's or S corporation's total assets on the date of 
issuance;
    (ii) The trade or business expenditures of the partnership or S 
corporation that issued the debt instrument represented at least 80 
percent of the partnership's or S corporation's total expenditures for 
the taxable year of issuance;
    (iii) At least 95 percent of interest paid or accrued on the debt 
instrument issued by the partnership or S corporation was allocated to 
one or more trade or business expenditures under Sec.  1.163-8T for the 
taxable year of issuance;
    (iv) At least 95 percent of the proceeds from the debt instrument 
issued by the partnership or S corporation were used by the partnership 
or S corporation to acquire one or more trades or businesses within six 
months from the date of issuance; or
    (v) The partnership or S corporation issued the debt instrument to 
a seller of a trade or business to acquire the trade or business.
    (2) Deferral of OID at entity level--(i) In general. For each 
taxable year during the deferral period, an issuing entity determines 
the amount of its deferred OID deduction with respect to a debt 
instrument, if any. An issuing entity's deferred OID deduction for a 
taxable year is the lesser of:
    (A) The OID that accrues in a current taxable year during the 
deferral period with respect to the debt instrument (less any of such 
OID that is allowed as a deduction in the current taxable year as a 
result of an acceleration event), or
    (B) The excess, if any, of the electing entity's deferred COD 
income (less the aggregate amount of such deferred COD income that has 
been included in income in the current taxable year and any previous 
taxable year during the deferral period) over the aggregate amount of 
OID that accrued in previous taxable years during the deferral period 
with respect to the debt instrument (less the aggregate amount of such 
OID that has been allowed as a deduction in the current taxable year 
and any previous taxable year during the deferral period).
    (ii) Excess deferred OID deduction. If, as a result of an 
acceleration event during a taxable year in the deferral period, an 
issuing entity's aggregate deferred OID deduction for previous taxable 
years with respect to a debt instrument (less the aggregate amount of 
such deferred OID deduction that has been allowed as a deduction in a 
previous taxable year during the deferral period) exceeds the amount of 
the electing entity's deferred COD income (less the aggregate amount of 
such deferred COD income that has been included in income in the 
current taxable year and any previous taxable year during the deferral 
period), the excess deferred OID deduction shall be allowed as a 
deduction in the taxable year in which the acceleration event occurs.
    (iii) Examples. The following examples illustrate the rules under 
paragraph (d)(2) of this section:
    Example 1. Partner joins partnership during deferral period. (i) 
A and B each hold a 50 percent interest in AB partnership, a 
calendar-year partnership. On January 1, 2009, AB partnership issues 
a new debt instrument with OID and uses all of the proceeds to 
reacquire an outstanding applicable debt instrument of AB 
partnership, realizing $100 of COD income, and makes an election 
under section 108(i) to defer $50 of the COD income. During the 
deferral period, a total of $150 of OID accrues on the new debt 
instrument issued as part of the reacquisition. A and B each have a 
deferred amount of $25 with respect to the applicable debt 
instrument reacquired by AB partnership. For 2009, $28 of OID 
accrues on the new debt instrument and A and B are each allocated 
$14 of accrued OID with respect to the new debt instrument. On 
January 1, 2010, C contributes cash to AB partnership in exchange 
for a \1/3\ partnership interest. For 2010, $29 of OID accrues on 
the new debt instrument, and A, B, and C are each allocated $9.67 of 
accrued OID.
    (ii) Under paragraph (d)(2) of this section, AB partnership's 
deferred OID deduction for 2009 is the lesser of: $28 of OID that 
accrues on the new debt instrument in 2009, or the excess of AB 
partnership's deferred COD income of $50 over the aggregate amount 
of OID that accrued on the debt instrument in previous taxable years 
during the deferral period of $0, or $50. Thus, all $28 of the OID 
that accrues on the debt instrument in 2009 is deferred under 
section 108(i).
    (iii) Under paragraph (d)(2) of this section, AB partnership's 
deferred OID deduction for 2010 is the lesser of: $29 of OID that 
accrues on the new debt instrument in 2010, or the excess of AB 
partnership's deferred COD income of $50 over the aggregate amount 
of OID that accrued on the debt instrument in previous taxable years 
during the deferral period of $28, or $22. Thus, $22 of the $29 of 
OID that accrues in 2010 is deferred under section 108(i). A, B, and 
C will each defer $7.33 of the $9.67 of accrued OID that was 
allocated to each of them.
    Example 2. Acceleration of deferred items during deferral 
period. (i) On January 1, 2009, ABC partnership, a calendar-year 
partnership with three partners, issues a new debt instrument with 
OID and uses all of the proceeds to reacquire an outstanding 
applicable debt instrument of ABC partnership. ABC partnership 
realizes $150 of COD income and makes an election under section 
108(i) to defer the $150 of COD income. A's deferred amount with 
respect to the applicable debt instrument is $75, while B and C each 
have a deferred amount of $37.50. In 2009, $28 of OID accrues on the 
new debt instrument and is allocated $7.00 to A and $10.50 to each 
of B and C. In 2010, $29 of OID accrues on the new debt instrument 
and is allocated $7.25 to A and $10.87 to each of B and C. In 2011, 
$30 of OID accrues on the new debt instrument and is allocated $7.50 
to A and $11.25 to each of B and C. In 2012, $31 of OID accrues on 
the new debt instrument and is allocated $7.75 to A and $11.62 to 
each of B and C. On December 31, 2012, A's entire share of ABC 
partnership's deferred items is accelerated under paragraph (b)(6) 
of this section. For 2012, A includes $75 of COD income in income 
and is allowed a deduction of $21.75 for A's share of ABC 
partnership's deferred OID deduction for taxable years 2009 through 
2011, and a deduction of $7.75 for A's share of ABC partnership's 
OID that accrues on the debt instrument in 2012.
    (ii) Under paragraph (d)(2) of this section, ABC partnership's 
deferred OID deduction for 2012 is the lesser of: $23.35 ($31 of OID 
that accrues on the new debt instrument in 2012 less $7.75 of this 
OID that is allowed as a deduction to A in 2012) or $9.75 (the 
excess of $75 (ABC partnership's deferred COD income of $150 less 
A's share of ABC partnership's deferred COD income that is included 
in A's income for 2012 of $75) over $65.25 (the aggregate amount of 
OID that accrued in previous taxable years of $87 less the aggregate 
amount of such OID that has been allowed as a deduction by A in 2012 
of $21.75)). Thus, of the $31 of OID that accrues in 2012, $9.75 is 
deferred under section 108(i).
    (3) Effect of an election under section 108(i) on recapture amounts 
under section 465(e)--(i) In general. To the extent that a decrease in 
a partner's or shareholder's amount at risk (as defined in section 465) 
in an activity as a result of a reacquisition of an applicable debt 
instrument would cause a partner with a deferred amount or a 
shareholder with a share of the S corporation's deferred COD income to 
have income under section 465(e) in the taxable year of the 
reacquisition, such decrease (not to exceed the partner's deferred 
amount or the shareholder's share of the S corporation's deferred COD 
income with respect to that applicable debt instrument) (deferred 
section 465 amount) shall not be taken into account for purposes of 
determining the partner's or shareholder's amount at risk in an 
activity under section 465 as of the close of the taxable year of the 
reacquisition. A partner's or shareholder's deferred section 465 amount 
is treated as a decrease in the partner's or shareholder's amount at 
risk in an activity at the same time, and to the extent remaining in 
the same amount, as the partner recognizes its deferred amount or the S 
corporation shareholder recognizes its share of the S corporation's 
deferred COD income.
    (ii) Example. The following example illustrates the rules in 
paragraph (d)(3) of this section:


[[Page 39984]]


    Example. (i) PRS is a calendar-year partnership with two equal 
partners, individuals A and B. PRS is engaged in an activity 
described in section 465(c) (Activity). PRS has a $500 recourse 
applicable debt instrument outstanding. Each partner's amount at 
risk on January 1, 2009 is $50. On June 1, 2009, the creditor agrees 
to cancel the $500 indebtedness. PRS realizes $500 of COD income as 
a result of the reacquisition. The partners' share of the 
liabilities of PRS decreases by $500 under section 752(b), and each 
partner's amount at risk is decreased by $250. Other than the $500 
of COD income, PRS's income and expenses for 2009 are equal. PRS 
makes an election under section 108(i) to defer $200 of the $500 COD 
income realized in connection with the reacquisition. PRS allocates 
the $500 of COD income equally between its partners, A and B. A and 
B each have a COD income amount of $250 with respect to the 
applicable debt instrument. PRS determines that, for both partners A 
and B, $100 of the $250 COD income amount is the deferred amount, 
and $150 is the included amount. Beginning in each taxable year 2014 
through 2018, A and B each include $20 of the deferred amount in 
gross income.
    (ii) Under paragraph (d)(3)(i) of this section, $50 of the $250 
decrease in A's and B's amount at risk in Activity is the deferred 
section 465 amount for each of A and B and is not taken into account 
for purposes of determining A's and B's amount at risk in Activity 
at the close of 2009. In taxable year 2014, A's and B's amount at 
risk in Activity is decreased by $20 (deferred section 465 amount 
that equals the deferred amount included in A's and B's gross income 
in 2014). In taxable year 2015, A's and B's amount at risk in 
Activity is decreased by $20 for the deferred section 465 amount 
that equals the deferred amount included in A's and B's gross income 
in 2015. In taxable year 2016, A's and B's amount at risk in 
Activity is decreased by $10 (the remaining amount of the deferred 
section 465 amount).
    (e) Election procedures and reporting requirements--(1) 
Partnerships--(i) In general. A partnership makes an election under 
section 108(i) by following procedures outlined in guidance and 
applicable forms and instructions issued by the Commissioner. An 
electing partnership (or its successor) must provide to its partners 
certain information as required by guidance and applicable forms and 
instructions issued by the Commissioner.
    (ii) Tiered passthrough entities. A partnership that is a direct or 
indirect partner of an electing partnership (or its successor) or a 
related partnership or an S corporation partner must provide to its 
partners or shareholders, as the case may be, certain information as 
required by guidance and applicable forms and instructions issued by 
the Commissioner.
    (iii) Related partnerships. A related partnership must provide to 
its partners certain information as required by guidance and applicable 
forms and instructions issued by the Commissioner.
    (2) S corporations--(i) In general. An S corporation makes an 
election under section 108(i) by following procedures outlined in 
guidance and applicable forms and instructions issued by the 
Commissioner. An electing S corporation (or its successor) must provide 
to its shareholders certain information as required by guidance and 
applicable forms and instructions issued by the Commissioner.
    (ii) Related S corporations. A related S corporation must provide 
to its shareholders certain information as required by guidance and 
applicable forms and instructions issued by the Commissioner.
    (f) Effective/applicability dates. For the applicability dates of 
this section, see Sec.  1.108(i)-0(b).


Sec.  1.108(i)-2T  [Removed]

    Par. 3. Section 1.108(i)-2T is removed.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 5. In Sec.  602.101, paragraph (b) is amended as follows:
    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)-2T.............................................       1545-2147
 
                                * * * * *
------------------------------------------------------------------------

    2. The following entry is added in numerical order to the table to 
read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control no.
------------------------------------------------------------------------
 
                                * * * * *
1.108(i)-2..............................................       1545-2147
 
                                * * * * *
------------------------------------------------------------------------


Beth Tucker,
Deputy Commissioner for Operations Support.
    Approved: June 25, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury.
[FR Doc. 2013-15885 Filed 7-2-13; 8:45 am]
BILLING CODE 4830-01-P