Temp. regs. on attribute reduction when a consolidated group member realizes DOI income.

• Author: Yecies, Mark

Temporary regulations (TD 9089) address reducing tax attributes when a consolidated group member realizes discharge of indebtedness (DOI) income on debt that is not an inter-company obligation under Regs. Sec. 1.1502-13(g). Essentially, Temp. Regs. Sec. 1.1502-28T adopts a consolidated approach to attribute reduction and applies to DOI occurring after Aug. 29, 2003.

Background

When a debtor corporation is in bankruptcy or insolvent (to the extent of the debtor's insolvency) or has qualified farm debt, and such debt is discharged, instead of including the discharged debt in income, it must reduce its tax attributes by the debt discharged, under Sec. 108(b)(1). Unless the corporation makes an election under Sec. 108(b)(5), tax attributes are reduced in the following order, under Sec. 108(b)(2): (1) net operating losses and net operating loss carryovers; (2) general business credits under Sec. 38; (3) minimum tax credits under Sec. 53(b); (4) net capital losses and capital loss carryovers; (5) asset basis; (6) passive activity loss and credit carryovers under Sec. 469(b); and (7) foreign tax credits and foreign tax credit carryovers.

Sec. 108 generally offers a debtor a temporary tax deferral, rather than an income exclusion, by making attributes unavailable to offset income in later years. Until the temporary regulations were released, uncertainty existed as to whether Sec. 108(b) should be applied on a separate-entity or a consolidated basis when the debtor was a consolidated group member.

Temporary Regulations

As noted above, Temp. Regs. Sec. 1.1502-28T adopts a consolidated approach that reduces all consolidated tax attributes available to the debtor (including those attributable to members other than the debtor member (DM)). In contrast, because the basis of assets held by members other than the DM are not directly available to offset the DM's income, the temporary regulations reduce the members' asset bases only in limited circumstances. Temp. Regs. Sec. 1.1502-28T(a)(2)-(4) adopt the following ordering rules for attribute reduction:

* DM's attributes. Under Temp. Regs. Sec. 1.1502-28T(a)(2), the DM'S attributes are reduced first, including (1) consolidated attributes attributable to the DM; (2) attributes arising in the DM'S separate return limitation years (SRLYs); and (3) basis of the DM'S property.

* Look-through rule. According to Temp. Regs. Sec. 1.1502-28T(a)(3)(ii), if the DM's attribute reduced is the basis of stock of another...