Sec. 108(i): considerations for electing consolidated groups.

• Author: Hoyt, Sarah

Enacted in 2009, the American Recovery and Reinvestment Act, RL. 111-5, added Sec. 108(i) to the Internal Revenue Code. Sec. 108(i) generally provides relief to corporate and certain other business taxpayers by giving them an option to irrevocably elect to defer recognition of cancellation-of-debt (COD) income resulting from a reacquisition of applicable debt instruments in tax years 2009 and 2010.

This COD income is includible in gross income ratably over a five-tax-year inclusion period beginning with the fifth tax year following the tax year of the reacquisition (if it occurred in 2009) or with the fourth tax year of the reacquisition (if it occurred in 2010). Therefore, electing taxpayers generally began including their respective deferred income on 2014 tax returns. However, Sec. 108(i)(5)(D)(i) provides for immediate recognition of the entire amount upon the occurrence of certain mandatory acceleration events, including certain changes in tax status and cessation of corporation existence. The following example illustrates the timing of a Sec. 108(i) election in a consolidated group.

Example 1: In 2009, P (the common parent) owns all the stock of S1 (member of the group), and S1 reacquires its own indebtedness and realizes $500 of COD income. Pursuant to an election under Sec. 108(i), S1 will defer its income for the following five years (2009-2013) and then ratably include its income for five years (2014-2018), as shown in the exhibit below.

As long as S1 does not undergo a mandatory acceleration event, it should take S1 (and the P Group) approximately 10 years to include the entire $500 of deferred COD income.

Corporate and Consolidated Group Treatment

In the context of consolidated groups, the common parent makes the Sec. 108(i) election on behalf of all members of the group (Rev. Proc. 2009-37). The regulations under Sec. 108(i) provide special rules for consolidated groups; for example, an electing member (other than the common parent) of a consolidated group may elect at any time to accelerate the inclusion of its remaining deferred COD income with respect to all applicable debt instruments. In addition, the determination of whether the member has engaged in an "impairment transaction" (i.e., a transaction that impairs an electing corporation's ability to pay the amount of federal income tax on its deferred COD income) is made on a groupwide basis.

Consolidated groups (and separate corporations) that undertake certain...