20590 Federal Register / Vol. 76, No. 71 / Wednesday, April 13, 2011 / Proposed Rules 

IV. Comments 

Regardless of attendance at the public 

meeting, interested persons may submit 

to the Division of Dockets Management 

(see table 1 of this document) either 

electronic or written comments for 

consideration at or after the meeting in 

addition to, or in place of, a request for 

an opportunity to make an oral 

presentation. It is only necessary to send 

one set of comments. It is no longer 

necessary to send two copies of mailed 

comments. Received comments may be 

seen in the Division of Dockets 

Management between 9 a.m. and 4 p.m., 

Monday through Friday. 

V. Transcripts 

Please be advised that as soon as a 

transcript is available, it will be 

accessible at http://www.regulations.gov 

and http://www.fda.gov/Food/

FoodSafety/FSMA/default.htm. It may 

be viewed at the Division of Dockets 

Management (HFA–305), Food and Drug 

Administration, 5630 Fishers Lane, rm. 

1061, Rockville, MD 20852. A transcript 

will also be available in either hardcopy 

or on CD–ROM, after submission of a 

Freedom of Information request. Written 

requests are to be sent to Division of 

Freedom of Information (HFI–35), Office 

of Management Programs, Food and 

Drug Administration, 5600 Fishers 

Lane, rm. 6–30, Rockville, MD 20857. 

Dated: April 7, 2011. 

David Dorsey, 

Acting Deputy Commissioner for Policy, 

Planning and Budget. 

[FR Doc. 2011–8785 Filed 4–12–11; 8:45 am] 

BILLING CODE 4160–01–P 

DEPARTMENT OF STATE 

22 CFR Parts 120 and 124 

[Public Notice: 7415] 

RIN 1400–AC80 

International Traffic in Arms 

Regulations: Defense Services 

AGENCY: Department of State. 

ACTION: Proposed rule. 

SUMMARY: The Department of State 

proposes to amend the International 

Traffic in Arms Regulations (ITAR) to 

update the policy regarding defense 

services, to clarify the scope of activities 

that are considered a defense service, 

and to provide definitions of 

‘‘Organizational-Level Maintenance,’’ 

‘‘Intermediate-Level Maintenance,’’ and 

‘‘Depot-Level Maintenance,’’ and to 

make other conforming changes. 

DATES: The Department of State will 

accept comments on this proposed rule 

until June 13, 2011. 

ADDRESSES: Interested parties may 

submit comments within 60 days of the 

date of the publication by any of the 

following methods: 

• E-mail: 

DDTCResponseTeam@state.gov with the 

subject line, ‘‘Regulatory Changes— 

Defense Services.’’ 

• Mail: PM/DDTC, SA–1, 12th Floor, 

Directorate of Defense Trade Controls, 

Office of Defense Trade Controls Policy, 

ATTN: Regulatory Changes—Defense 

Services, Bureau of Political Military 

Affairs, U.S. Department of State, 

Washington, DC 20522–0112. 

• Internet: View this notice by 

searching for its RIN on the U.S. 

Government regulations Web site at 

http://www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: 

Director Charles B. Shotwell, Office of 

Defense Trade Controls Policy, 

Department of State, Telephone (202) 

663–1282 or Fax (202) 261–8199; E-mail 

DDTCResponseTeam@state.gov. ATTN: 

Regulatory Changes—Defense Services. 

SUPPLEMENTARY INFORMATION: As part of 

the President’s Export Control Reform 

effort, the Department of State is 

proposing to amend parts 120 and 124 

of the ITAR to reflect new policy 

regarding coverage of defense services. 

The Department reviewed the ITAR’s 

treatment of defense services with a 

view to enhancing support to allies and 

friends, improving efficiency in 

licensing, and reducing unintended 

consequences. As a result, it was 

determined that the current definition of 

defense services in § 120.9 is overly 

broad, capturing certain forms of 

assistance or services that do not 

warrant ITAR control. The proposed 

change in subpart (a) of the definition of 

‘‘defense services’’ narrows the focus of 

services to furnishing of assistance 

(including training) using ‘‘other than 

public domain data’’, integrating items 

into defense articles, or training of 

foreign forces in the employment of 

defense articles. Consequently, services 

based solely upon the use of public 

domain data would not constitute 

defense services under this part of the 

definition and, therefore, would not 

require a license, technical assistance 

agreement, or manufacturing license 

agreement to provide to a foreign 

person. The proposed new definition of 

defense service also includes a new 

provision that would control the 

‘‘integration’’ of items, whether 

controlled by the U.S. Munitions List 

(USML) or the Commerce Control List 

(CCL), into USML controlled defense 

articles even if ITAR-controlled 

‘‘technical data’’ is not provided to a 

foreign person during the provision of 

such services. Additionally, the new 

rule specifies that training for foreign 

‘‘units or forces’’ will be considered a 

defense service only if the training 

involves the employment of a defense 

article, regardless of whether technical 

data is involved. This operational 

definition improves upon the current 

open-ended wording of § 120.9(a)(3), 

which covers ‘‘military training of 

foreign units and forces.’’ Also, 

significantly, the proposed new rule 

specifies in subpart (b) examples of 

activities that do not constitute defense 

services. For example, the proposed 

new rule would prevent the anomalous 

situation where foreign companies are 

reluctant to hire U.S. citizens for fear 

that such employment alone constitutes 

a defense service, even where no 

technical data would be transferred to 

the employer. 

A new § 120.38 is proposed to provide 

definitions for ‘‘Organizational-Level 

Maintenance’’ (or basic level 

maintenance), ‘‘Intermediate-Level 

Maintenance,’’ and ‘‘Depot-Level 

Maintenance,’’ terms used in the 

proposed revision of § 120.9. 

The Department proposes to make 

several other conforming changes to the 

ITAR. The proposed rule modifies 

§ 124.1(a), which describes the approval 

requirements of manufacturing license 

agreements and technical assistance 

agreements. The proposed change 

removes the requirement in § 124.1(a) to 

seek the Directorate of Defense Trade 

Controls’ approval if the defense service 

that is being rendered uses public 

domain data or data otherwise exempt 

from ITAR licensing requirements. This 

change would be made to conform with 

the revisions made to § 120.9. The 

Department proposes to delete 

§ 124.2(a), as this requirement is no 

longer applicable as a result of proposed 

changes to § 120.9. Conforming changes 

are to be made to § 124.2(c) to reflect the 

proposed deletion of § 124.2(a). 

This proposed rule was presented to 

the Defense Trade Advisory Group 

(DTAG), a Department of State advisory 

committee, for purposes of comment 

and evaluation. The DTAG commented 

favorably on most aspects of this 

proposed rule, but also recommended 

certain changes. Having thoroughly 

reviewed and evaluated the comments 

and the recommended changes, the 

Department has determined that it will 

proceed with the proposed rule per the 

Department’s evaluation of the written 

comments and recommendations as 

follows: 


srobinson on DSKHWCL6B1PROD with PROPOSALS
Federal Register / Vol. 76, No. 71 / Wednesday, April 13, 2011 / Proposed Rules 20591 

The DTAG recommended the qualifier 

‘‘U.S. origin’’ be added before ‘‘technical 

data’’ in the proposed § 120.9. We note 

the current definition of technical data 

in § 120.10 is not restricted to U.S. 

origin data. We do not believe that a 

departure from the existing definition of 

technical data for the purposes of 

defense services is prudent. However, 

the confusion caused by the term 

‘‘technical data’’ lead to the rewrite of 

the definition to require the use of data 

‘‘other than public domain data’’ as the 

regulatory standard. This rewrite 

provides clarity and an objective 

standard that can be easily applied. 

Using data that is ‘‘other than public 

domain data,’’ including proprietary 

data or ‘‘technology’’ ‘‘subject to the 

Export Administration Regulations,’’ to 

provide assistance would constitute a 

defense service under this change. The 

DTAG also recommended adding 

definitions of ‘‘intermediate or depot 

level repair or maintenance.’’ We agreed 

with the recommendation and added 

such definitions in a new § 120.38. The 

DTAG agreed with the addition of 

‘‘integration’’ but recommended that a 

definition of that term be added, 

especially to distinguish it from 

‘‘installation.’’ We declined to accept 

that recommendation, finding that 

integration has plain meaning in the 

context of the proposed rule. As used in 

the proposed definition of defense 

services, ‘‘installation’’ means the act of 

putting something in its pre-determined 

place and does not require changes or 

modifications to the item in which it is 

being installed (e.g., installing a 

dashboard radio into a military vehicle 

where no changes or modifications to 

the vehicle are required; connecting 

wires and fastening the radio inside of 

the preexisting opening is the only 

assistance that is necessary). 

‘‘Integration’’ means the systems 

engineering design process of uniting 

two or more things in order to form, 

coordinate, or blend into a functioning 

or unified whole, including 

introduction of software to enable 

proper operation of the device. This 

includes determining where to install 

something (e.g., integration of a civil 

engine into a destroyer which requires 

changes or modifications to the 

destroyer in order for the civil engine to 

operate properly; not simply plug and 

play). The DTAG suggested that 

language in § 120.9(a)(3) be changed 

from ‘‘whether or not use of technical 

data is involved’’ to ‘‘whether or not the 

transfer of technical data is involved.’’ 

We adopted that recommendation. 

The DTAG suggested we add 

definitions of ‘‘irregular forces’’ and 

‘‘tactical employment.’’ We did not agree 

with the need to define the first term, 

believing that the meaning should be 

clear in the context of the proposed rule. 

Subsequent to the DTAG’s evaluation of 

this proposed rule, the word ‘‘tactical’’ 

was removed from before the word 

‘‘employment’’ in § 120.9(a)(3). In 

§ 120.9(a)(3), the DTAG recommended 

we change ‘‘conducting direct combat 

operations or providing intelligence 

services for a foreign person’’ to 

‘‘conducting direct combat operations of 

a military function for or providing 

military intelligence services to a 

foreign person.’’ We do not believe that 

adding the words ‘‘military function’’ or 

‘‘military’’ are necessary or add clarity. 

The clarification in subsection § 120.9 

(b)(5) suffices. 

The DTAG advised that ‘‘U.S. citizen’’ 

in § 120.9 (b)(2) be changed to ‘‘U.S. 

person.’’ We did not concur with that 

recommendation because the proposed 

rule was intended to cover individuals, 

not business entities such as 

corporations. The use of ‘‘U.S. persons’’ 

would have included the latter. The 

DTAG recommended we add the words 

‘‘or installed’’ after the word ‘‘integrated’’ 

in § 120.9 (b)(3). We accepted the 

inclusion of those words, but 

subsequently changed the word 

‘‘integrated’’ to ‘‘incorporated.’’ The 

DTAG also suggested adding ‘‘physical 

security or personal protective training’’ 

to § 120.9 (b)(4). We accepted that 

change. 

Regulatory Analysis and Notices 

Administrative Procedure Act 

The Department of State is of the 

opinion that controlling the import and 

export of defense services is a foreign 

affairs function of the United States 

Government and that rules 

implementing this function are exempt 

from § 553 (Rulemaking) and § 554 

(Adjudications) of the Administrative 

Procedure Act. Although the 

Department is of the opinion that this 

proposed rule is exempt from the 

rulemaking provisions of the APA, the 

Department is publishing this proposed 

rule with a 60-day provision for public 

comment and without prejudice to its 

determination that controlling the 

import and export of defense services is 

a foreign affairs function. 

Regulatory Flexibility Act 

Since this proposed amendment is not 

subject to 5 U.S.C. 553, it does not 

require analysis under the Regulatory 

Flexibility Act. 

Unfunded Mandates Reform Act of 1995 

This proposed amendment does not 

involve a mandate that will result in the 

expenditure by State, local, and tribal 

governments, in the aggregate, or by the 

private sector, of $100 million or more 

in any year and it will not significantly 

or uniquely affect small governments. 

Therefore, no actions were deemed 

necessary under the provisions of the 

Unfunded Mandates Reform Act of 

1995. 

Small Business Regulatory Enforcement 

Fairness Act of 1996 

This proposed amendment has been 

found not to be a major rule within the 

meaning of the Small Business 

Regulatory Enforcement Fairness Act of 

1996. 

Executive Orders 12372 and 13132 

This proposed amendment will not 

have substantial direct effects on the 

States, on the relationship between the 

national government and the States, or 

on the distribution of power and 

responsibilities among the various 

levels of government. Therefore, in 

accordance with Executive Order 13132, 

it is determined that this proposed 

amendment does not have sufficient 

federalism implications to require 

consultations or warrant the preparation 

of a federalism summary impact 

statement. The regulations 

implementing Executive Order 12372 

regarding intergovernmental 

consultation on Federal programs and 

activities do not apply to this proposed 

amendment. 

Executive Order 12866 

The Department of State does not 

consider this proposed rule to be a 

‘‘significant regulatory action’’ under 

Executive Order 12866, section 3(f), 

Regulatory Planning and Review. The 

Department is of the opinion that 

controlling the import and export of 

defense articles and services is a foreign 

affairs function of the United States 

Government and that rules governing 

the conduct of this function are exempt 

from the requirements of Executive 

Order 12866. 

Executive Order 13563 

The Department of State has 

considered this rule in light of Section 

1(b) of Executive Order 13563, dated 

January 18, 2011, and affirms that this 

regulation is consistent with the 

guidance therein. 

Executive Order 12988 

The Department of State has reviewed 

this proposed amendment in light of 

sections 3(a) and 3(b)(2) of Executive 


srobinson on DSKHWCL6B1PROD with PROPOSALS
20592 Federal Register / Vol. 76, No. 71 / Wednesday, April 13, 2011 / Proposed Rules 

Order 12988 to eliminate ambiguity, 

minimize litigation, establish clear legal 

standards, and reduce burden. 

Executive Order 13175 

The Department of State has 

determined that this proposed 

amendment will not have tribal 

implications, will not impose 

substantial direct compliance costs on 

Indian tribal governments, and will not 

pre-empt tribal law. Accordingly, the 

requirement of Section 5 of Executive 

Order 13175 does not apply to this 

proposed amendment. 

Paperwork Reduction Act 

This proposed amendment does not 

impose any new reporting or 

recordkeeping requirements subject to 

the Paperwork Reduction Act, 44 U.S.C. 

Chapter 35. 

List of Subjects in 22 CFR Parts 120 and 

124 

Arms and munitions, Exports. 

Accordingly, for the reasons set forth 

above, title 22, chapter I, subchapter M, 

parts 120 and 124 are amended as 

follows: 

PART 120—PURPOSE AND 

DEFINITIONS 

1. The authority citation for part 120 

continues to read as follows: 

Authority: Secs. 2, 38, and 71, Pub. L. 90– 

629, 90 Stat. 744 (22 U.S.C. 2752, 2778, 

2797); 22 U.S.C. 2794; E.O. 11958, 42 FR 

4311; E.O. 13284, 68 FR 4075; 3 CFR, 1977 

Comp. p. 79; 22 U.S.C. 2651a; Pub. L. 105– 

261, 112 Stat. 1920. 

2. Section 120.9 is amended by 

revising paragraphs (a)(1), (a)(2), and 

(a)(3), and adding new paragraphs (a)(4) 

and (b) to read as follows: 

§ 120.9 Defense service. 

(a) * * * 

(1) The furnishing of assistance 

(including training) using other than 

public domain data to foreign persons 

(see § 120.16 of this subchapter), 

whether in the United States or abroad, 

in the design, development, 

engineering, manufacture, production, 

assembly, testing, intermediate or depot 

level repair or maintenance (see 

§ 120.38 of this subchapter), 

modification, demilitarization, 

destruction, or processing of defense 

articles (see § 120.6 of this subchapter); 

or 

(2) The furnishing of assistance to 

foreign persons, whether in the United 

States or abroad, for the integration of 

any item controlled on the U.S. 

Munitions List (USML) (see § 121.1 of 

this subchapter) or the Commerce 

Control List (see 15 CFR part 774) into 

an end item (see § 121.8(a) of this 

subchapter) or component (see 

§ 121.8(b) of this subchapter) that is 

controlled as a defense article on the 

USML, regardless of the origin; or 

(3) Training or providing advice to 

foreign units and forces, regular and 

irregular, regardless of whether 

technical data is transferred to a foreign 

person, including formal or informal 

instruction of foreign persons in the 

United States or abroad by any means 

including classroom or correspondence 

instruction, conduct or evaluation of 

training and training exercises, in the 

employment of defense articles; or 

(4) Conducting direct combat 

operations for or providing intelligence 

services to a foreign person directly 

related to a defense article. 

(b) The following is not a defense 

service: 

(1) Training in the basic operation 

(functional level) or basic maintenance 

(see § 120.38) of a defense article; or 

(2) Mere employment of a U.S. citizen 

by a foreign person; or 

(3) Testing, repair, or maintenance of 

an item ‘‘subject to the Export 

Administration Regulations’’ (see 15 

CFR 734.2) administered by the 

Department of Commerce, Bureau of 

Industry and Security, that has been 

incorporated or installed into a defense 

article; or 

(4) Providing law enforcement, 

physical security or personal protective 

training, advice, or services to or for a 

foreign person (see § 120.16 of this 

subchapter), using only public domain 

data; or 

(5) Providing assistance (including 

training) in medical, logistical (other 

than maintenance), or other 

administrative support services to or for 

a foreign person. 

3. Sections 120.33 through 120.37 are 

added and reserved, and a new § 120.38 

is to be added to read as follows: 

§ 120.33–120.37 [Reserved] 

§ 120.38 Maintenance levels. 

(a) Organizational-level maintenance 

(or basic level maintenance) is the first 

level of maintenance performed by an 

end-user unit or organization ‘‘onequipment’’ (directly on the defense 

article or support equipment) assigned 

to the inventory of the end-user unit or 

organization. Its phases consist of 

repair, inspecting, servicing, or 

calibration, testing, lubricating and 

adjusting equipment, as well as 

replacing minor parts, components, 

assemblies and line-replaceable spares 

or units. 

(b) Intermediate-level maintenance is 

second-level maintenance performed 

‘‘off-equipment’’ (on removed 

components, parts, or equipment) by 

designated maintenance shops or 

centers, tenders, and mobile teams in 

direct support of end-users units or 

organizations. Its phases consist of: 

Calibration, repair, or testing and 

replacement of damaged or 

unserviceable parts, components, or 

assemblies. 

(c) Depot-level maintenance is thirdlevel maintenance performed on-or offequipment at or by a major repair 

facility, shipyard, or field team with 

extensive equipment, and personnel of 

higher technical skill in direct support 

of end-user units or organizations. It 

consists of providing evaluation or 

repair beyond unit or organizations 

capability. Its phases include: 

Inspection, testing, calibration or repair, 

including overhaul, reconditioning and 

one-to-one replacement of any defective 

items, parts or components; and 

excluding any modification, 

enhancement upgrade or other form of 

alteration or improvement that enhances 

the performance or capability of the 

defense article. 

PART 124—AGREEMENTS, OFFSHORE PROCUREMENT AND OTHER 

DEFENSE SERVICES 

4. The authority citation for part 124 

continues to read as follows: 

Authority: Sec. 2, 38, and 71, Pub. L. 90– 

629, 90 Stat. 744 (22 U.S.C. 2752, 2778, 

2797); E.O. 11958, 42 FR 4311; 3 CFR 1977 

Comp. p. 79; 22 U.S.C. 2651a; 22 U.S.C. 2776; 

Pub. L. 105–261. 

5. Section 124.1(a) is revised to read 

as follows: 

§ 124.1 Manufacturing license agreements 

and technical assistance agreements. 

(a) Approval. The approval of the 

Directorate of Defense Trade Controls 

must be obtained before the defense 

services described in § 120.9(a) of this 

subchapter may be furnished. In order 

to obtain such approval, the U.S. person 

must submit a proposed agreement to 

the Directorate of Defense Trade 

Controls. Such agreements are generally 

characterized as manufacturing license 

agreements, technical assistance 

agreements, distribution agreements, or 

off-shore procurement agreements, and 

may not enter into force without the 

prior written approval of the Directorate 

of Defense Trade Controls. Once 

approved, the defense services 

described in the agreements may 

generally be provided without further 

licensing in accordance with §§ 124.3 

and 125.4(b)(2) of this subchapter. This 

requirement also applies to the training 

of any foreign military forces, regular 


srobinson on DSKHWCL6B1PROD with PROPOSALS
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