Federal Register / Vol. 76, No. 71 / Wednesday, April 13, 2011 / Proposed Rules 20593 

and irregular, in the employment of 

defense articles. Technical assistance 

agreements must be submitted in such 

cases. In exceptional cases, the 

Directorate of Defense Trade Controls, 

upon written request, will consider 

approving the provision of defense 

services described in § 120.9(a) of this 

subchapter by granting a license under 

part 125 of this subchapter. 

* * * * * 

6. In § 124.2, paragraph (a) is removed 

and reserved and paragraph (c) 

introductory text is revised to read as 

follows: 

§ 124.2 Exemptions for training and 

military service. 

(a) [Reserved] 

* * * * * 

(c) For NATO countries, Australia, 

Japan and Sweden, in addition to the 

basic maintenance information 

exemption in § 125.4(b)(5) of this 

subchapter, no technical assistance 

agreement is required for maintenance 

training or the performance of 

maintenance, including the export of 

supporting technical data, when the 

following criteria can be met: 

* * * * * 

Dated: April 5, 2011. 

Ellen O. Tauscher, 

Under Secretary, Arms Control and 

International Security, Department of State. 

[FR Doc. 2011–8998 Filed 4–12–11; 8:45 am] 

BILLING CODE 4710–25–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–154159–09] 

RIN 1545–BJ14 

Guidance Under Section 108(a) 

Concerning the Exclusion of Section 

61(a)(12) Discharge of Indebtedness 

Income of a Grantor Trust or a 

Disregarded Entity 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: This document contains 

proposed regulations relating to the 

exclusion from gross income under 

section 108(a) of discharge of 

indebtedness income of a grantor trust 

or an entity that is disregarded as an 

entity separate from its owner. The 

proposed regulations provide rules 

regarding the term ‘‘taxpayer’’ for 

purposes of applying section 108 to 

discharge of indebtedness income of a 

grantor trust or a disregarded entity. The 

proposed regulations affect grantor 

trusts, disregarded entities, and their 

owners. 

DATES: Written or electronic comments 

and requests for a public hearing must 

be received by July 12, 2011. 

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–154159–09), Room 

5203, Internal Revenue Service, P.O. 

Box 7604, Ben Franklin Station, 

Washington, DC 20044. Submissions 

may be hand-delivered Monday through 

Friday between the hours of 8 a.m. and 

4 p.m. to CC:PA:LPD:PR (REG–154159– 

09), Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC; or sent 

electronically, via the Federal 

eRulemaking Portal at http:// 

www.regulations.gov (IRS REG–154159– 

09). 

FOR FURTHER INFORMATION CONTACT: 

Bryan A. Rimmke or Benjamin H. 

Weaver, (202) 622–3050 (not a toll-free 

number). 

SUPPLEMENTARY INFORMATION: 

Background 

Section 61(a)(12) of the Internal 

Revenue Code (the Code) provides that 

income from the discharge of 

indebtedness is includable in gross 

income. However, such income may be 

excludable from gross income under 

section 108 in certain circumstances. 

Section 108(a)(1)(A) and (B) excludes 

from gross income any amount that 

would be includible in gross income by 

reason of the discharge of indebtedness 

of the taxpayer if the discharge occurs 

in a Title 11 case or to the extent the 

taxpayer is insolvent when the 

discharge occurs. Section 108(d)(1) 

through (3) provides the meaning of the 

terms ‘‘indebtedness of the taxpayer,’’ 

‘‘Title 11 case,’’ and ‘‘insolvent,’’ for 

purposes of applying section 108, and 

each definition uses the term ‘‘taxpayer.’’ 

Section 7701(a)(14) defines a taxpayer 

as any person subject to any internal 

revenue tax. 

Several types of disregarded entities 

exist under the Code and regulations. 

For instance, § 301.7701–2(a) of the 

Procedure and Administration 

Regulations provides that the term 

business entity includes an entity with 

a single owner that may be disregarded 

as an entity separate from its owner 

under § 301.7701–3; an example of a 

disregarded entity under this provision 

is a domestic single member limited 

liability company that does not elect to 

be classified as a corporation for Federal 

income tax purposes. Additionally, 

some disregarded entities are created by 

statute; examples of statutory 

disregarded entities include a 

corporation that is a qualified REIT 

subsidiary (within the meaning of 

section 856(i)(2)), and a corporation that 

is a qualified subchapter S subsidiary 

(within the meaning of section 

1361(b)(3)(B)). 

The activities of an entity that is a 

disregarded entity are treated in the 

same manner as a sole proprietorship, 

branch, or division of the owner (except 

for certain employment and excise tax 

rules). Accordingly, for Federal income 

tax purposes, all assets, liabilities, and 

items of income, deduction, and credit 

of a disregarded entity are treated as 

assets, liabilities, and such items (as the 

case may be) of the owner of the 

disregarded entity. 

A grantor trust is any portion of a 

trust that is treated (under subpart E of 

part I of subchapter J of chapter 1) as 

being owned by the grantor or another 

person. In the case of any grantor trust, 

items of income, deductions, and credits 

attributable to the trust are includable in 

computing the taxable income and 

credits of the owner. 

Explanation of Provisions 

The proposed regulations provide 

that, for purposes of applying section 

108(a)(1)(A) and (B) to discharge of 

indebtedness income of a grantor trust 

or a disregarded entity, the term 

taxpayer, as used in section 108(a)(1) 

and (d)(1) through (3), refers to the 

owner(s) of the grantor trust or 

disregarded entity. The proposed 

regulations further provide that grantor 

trusts and disregarded entities 

themselves will not be considered 

owners for this purpose. Finally, the 

proposed regulations provide that, in 

the case of a partnership, the owner 

rules apply at the partner level to the 

partners of the partnership to whom the 

discharge of indebtedness income is 

allocable. Thus, for example, if a 

partnership holds an interest in a 

grantor trust or disregarded entity, the 

applicability of section 108(a)(1)(A) and 

(B) to discharge of indebtedness income 

of the grantor trust or disregarded entity 

is tested by looking to the partners to 

whom the income is allocable. If any 

partner is itself a grantor trust or 

disregarded entity, the applicability of 

section 108(a)(1)(A) and (B) is 

determined by looking through such 

grantor trust or disregarded entity to the 

ultimate owner(s) of such partner. 

Some taxpayers have taken the 

position that the insolvency exception is 

available to the extent a grantor trust or 

disregarded entity is insolvent, even if 

its owner is not. The IRS and the 

Treasury Department do not believe this 


srobinson on DSKHWCL6B1PROD with PROPOSALS
20594 Federal Register / Vol. 76, No. 71 / Wednesday, April 13, 2011 / Proposed Rules 

is an appropriate application of the 

relevant statutory provisions. The 

proposed regulations clarify that, 

subject to the special rule for 

partnerships under section 108(d)(6), 

the insolvency exception is available 

only to the extent the owner is 

insolvent, as owner is determined as 

described in this preamble. 

Some taxpayers have taken the 

position that the bankruptcy exception 

is available if a grantor trust or 

disregarded entity is under the 

jurisdiction of a bankruptcy court, even 

if its owner is not. These taxpayers may 

argue that because, for Federal income 

tax purposes, the disregarded entity is 

disregarded and the ‘‘taxpayer’’ is the 

owner of the disregarded entity’s assets 

and liabilities, the taxpayer is properly 

seen as being subject to the bankruptcy 

court’s jurisdiction. Under the proposed 

regulations, it is insufficient for the 

grantor trust or disregarded entity to be 

subject to the bankruptcy court’s 

jurisdiction. The proposed regulations 

clarify that, subject to the special rule 

for partnerships under section 108(d)(6), 

the bankruptcy exception is available 

only if the owner of the grantor trust or 

disregarded entity is subject to the 

bankruptcy court’s jurisdiction, as 

owner is determined as described in this 

preamble. 

Proposed Effective/Applicability Date 

These regulations are proposed to 

apply to discharge of indebtedness 

income occurring on or after the date 

final regulations are published in the 

Federal Register. No inference is 

intended that the provisions set forth in 

these proposed regulations are not 

current law. 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. 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, and because the 

regulations do not impose a collection 

of information on small entities, the 

Regulatory Flexibility Act (5 U.S.C. 

chapter 6) does not apply. Pursuant to 

section 7805(f) of the Code, this 

regulation has been submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Comments and Requests for a Public 

Hearing 

Before the proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written (a signed original and eight (8) 

copies) or electronic comments that are 

submitted timely to the IRS. The IRS 

and Treasury Department request 

comments on the clarity of the proposed 

rules and how they can be made easier 

to understand. All comments will be 

available for public inspection and 

copying. A public hearing may be 

scheduled if requested in writing by any 

person that timely submits written 

comments. If a public hearing is 

scheduled, notice of the date, time, and 

place for the public hearing will be 

published in the Federal Register. 

Drafting Information 

The principal authors of these 

regulations are Bryan A. Rimmke and 

Benjamin H. Weaver, Office of the 

Associate Chief Counsel (Passthroughs 

& Special Industries). However, other 

personnel from the IRS and Treasury 

Department participated in its 

development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

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

Par. 2. Section 1.108–9 is added to 

read as follows: 

§ 1.108–9 Application of insolvency and 

bankruptcy provisions of section 108 to 

disregarded entities and grantor trusts. 

(a) General rule. For purposes of 

applying section 108(a)(1)(A) and (B) to 

discharge of indebtedness income of a 

grantor trust or disregarded entity, 

neither the grantor trust nor the 

disregarded entity shall be considered to 

be the ‘‘taxpayer,’’ as that term is used 

in section 108(a)(1) and (d)(1) through 

(3). Rather, for purposes of section 

108(a)(1) and (d)(1) through (3) and 

subject to section 108(d)(6), the owner 

of the grantor trust or disregarded entity 

is the taxpayer. If indebtedness of a 

grantor trust or disregarded entity is 

discharged in a Title 11 case, section 

108(a)(1)(A) will apply only to an owner 

of the grantor trust or disregarded entity 

that is under the jurisdiction of the 

court in a Title 11 case. If the grantor 

trust or disregarded entity is under the 

jurisdiction of the court in a Title 11 

case, but the owner of the grantor trust 

or disregarded entity is not, section 

108(a)(1)(A) will not apply to the 

discharge of indebtedness income. If 

indebtedness of a grantor trust or 

disregarded entity is otherwise 

discharged, section 108(a)(1)(B) will 

apply only to the extent the owner of 

the grantor trust or disregarded entity is 

insolvent. If the grantor trust or 

disregarded entity is insolvent, but the 

owner of the grantor trust or disregarded 

entity is not, section 108(a)(1)(B) will 

not apply to the discharge of 

indebtedness income. 

(b) Application to partnerships. Under 

section 108(d)(6), in the case of a 

partnership, section 108(a)(1)(A) and (B) 

applies at the partner level. 

Accordingly, in the case of a 

partnership, paragraph (a) of this section 

applies to the partners of such 

partnership to whom the discharge of 

indebtedness income is allocable. 

(c) Definitions—(1) Disregarded 

entities. For purposes of this section, a 

disregarded entity is an entity that is 

disregarded as an entity separate from 

its owner for Federal income tax 

purposes. Examples of disregarded 

entities include a domestic single 

member limited liability company that 

does not elect to be classified as a 

corporation for Federal income tax 

purposes, a corporation that is a 

qualified REIT subsidiary (within the 

meaning of section 856(i)(2)), and a 

corporation that is a qualified 

subchapter S subsidiary (within the 

meaning of section 1361(b)(3)(B)). 

(2) Grantor trust. For purposes of this 

section, a grantor trust is any portion of 

a trust that is treated under subpart E of 

part I of subchapter J of chapter 1 as 

being owned by the grantor or another 

person. 

(3) Owner. Notwithstanding any other 

provision of this section to the contrary, 

neither a grantor trust nor a disregarded 

entity shall be considered an owner for 

purposes of this section. 

(d) Effective/applicability date. The 

rules of this section are proposed to 

apply to discharge of indebtedness 

income occurring on or after the date 

final regulations are published in the 

Federal Register. 

Steven T. Miller, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. 2011–8758 Filed 4–12–11; 8:45 am] 

BILLING CODE 4830–01–P 


srobinson on DSKHWCL6B1PROD with PROPOSALS