Consolidated Sec. 108(b) attribute reduction--post-United Dominion.

• Author: Smith, Annette B.
• Position: Troubled-company debt restructuring

The Supreme Court's decision in United Dominion Industries, 532 US 822 (2001), raises the question of whether it provides any insight into the hotly debated Sec. 108(b) attribution-reduction issue, as it relates to "troubled-company" debt restructuring. Should only tax attributes of a separate member be reduced (the separate-member approach), or are consolidated tax attributes fair game (the single-entity approach)?

Attribute Reduction--Sec. 108(b)

If a creditor discharges a taxpayer's debt (in whole or in part), the taxpayer generally must include the cancellation of debt (COD) in gross income, unless an exclusion applies. Sec. 108(a) generally allows the taxpayer to exclude the COD income if the taxpayer is in a bankruptcy proceeding or is insolvent. If the latter, the taxpayer could exclude COD income only to the extent of insolvency. The cost of excluding COD income is tax-attribute reduction, pursuant to a specific ordering rule set forth in Sec. 108(b).

Sec. 108(b) does not provide clear guidance as to whether the single-entity or separate-member approach should be applied in a consolidated-group context. Questions include:

* Under Sec. 108(b), who is the taxpayer in a consolidated group? The amount of debt being discharged and the insolvency are determined using a separate-member approach; see Sec. 108(d)(3).

* How does a single-entity approach mesh with Sec. 108(b)(5), which provides a specific mechanism for reducing tax basis in depreciable property of affiliated corporations? (That is, what would be the need for Sec. 108(b)(5) if a single-entity approach were the correct standard?)

* How does a separate-member approach to attribute reduction reconcile with the existence of a consolidated net operating loss (CNOL), which is apportioned to the separate member on the occurrence of certain enumerated events?

* Do the answers to these questions square with handling excluded COD income under the consolidated investment-basis adjustment (IBA) and excess loss account (ELA) systems? Does a single-entity approach comport better with these systems than a separate-member approach? Letter Rulings 9121017 and 9650019 seemed to favor a separate-member approach, but recently the IRS appears to have changed course in favor of the single-entity theory; see Field Service Advice (FSA) 9912007 and Chief Counsel Advice (CCA) 200149008.

* Does United Dominion--with which the Supreme Court grappled as to whether the separate-member or single-entity...