45656 Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules 

89We have considered enhancing soft dollar 

disclosure requirements in the past. For example, 

the Commission proposed a rule in 1995 that would 

have required an adviser to provide its clients with 

an annual report setting forth certain information 

about the adviser’s use of client brokerage and the 

soft dollar services received by the adviser. The 

report would have included certain quantitative 

information about brokerage allocation and 

commissions paid. See Disclosure by Investment 

Advisers Regarding Soft Dollar Practices, 

Investment Advisers Act Release No. 1469 (Feb. 14, 

1995) [60 FR 9750 (Feb. 21, 1995)]. 

90See 1998 Staff Report. 

91 Id. 

92See Amendments to Form ADV, Investment 

Advisers Act Release No. 2711 (March 3, 2008) [73 

FR 13958 (March 14, 2008)]. As proposed, Item 12 

of Part 2 would require an adviser that receives soft 

dollar products and services to disclose its practices 

and to discuss the conflicts of interest they create. 

Specifically, Part 2 would require an adviser to 

disclose to clients: (i) That it receives a benefit 

because it does not have to produce or pay for the 

products and services; (ii) that it has an incentive 

to select broker-dealers based on its interests 

instead of clients’ interests in receiving best 

execution; (iii) whether or not it pays-up for soft 

dollar benefits; (iv) whether soft dollar benefits are 

used to service all of its accounts or just the 

accounts that paid for the benefits; and (v) the 

products and services it receives, describing them 

with enough specificity for clients to understand 

and evaluate possible conflicts of interest. 

93 Id. 

research that primarily or solely benefits 

another client of the adviser. We 

specifically ask for comment on the 

information that boards should request 

and that the adviser should provide in 

connection with the board’s review of 

the advisory contract under section 

15(c). 

IV. Disclosure to Other Advisory 

Clients and Fund Investors 

Our proposed guidance is designed to 

provide fund directors with information 

that will help them fulfill their oversight 

obligations with respect to the trading 

practices of the fund’s investment 

adviser, including the adviser’s use of 

soft dollars. The fact that the guidance 

is focused on fund boards should not be 

interpreted as an indication that the 

current level of soft dollar disclosure 

that is provided to other advisory clients 

and fund investors cannot be 

improved.89 Accordingly, we solicit 

comment on whether we should 

propose additional disclosure 

requirements. 

Currently, Part II of Form ADV, the 

adviser’s firm brochure, must address 

the adviser’s soft dollar practices. 

However, a 1998 report from our Office 

of Compliance Inspections and 

Examinations (‘‘OCIE’’) observed that 

advisers’ disclosure often failed to 

provide sufficient information for 

clients or prospective clients to 

understand the advisers’ soft dollar 

practices and the conflicts those 

practices present.90 In its report, OCIE 

stated that most advisers’ descriptions 

of soft dollar practices were boilerplate, 

and urged that we consider amending 

Form ADV to require better 

disclosure.91 We sought to address this 

concern in our proposed amendments to 

Part 2 of Form ADV.92 As currently 

proposed, Form ADV would require 

advisers to discuss the conflicts of 

interest inherent in an adviser’s soft 

dollar practices and to describe the 

products and services acquired with soft 

dollars with enough specificity to 

permit clients to evaluate the conflicts 

of interest involved.93

The guidance we are proposing today 

reflects the Commission’s view of the 

critical role fund boards play in 

managing the adviser’s conflicts of 

interest. We request general comment 

on our proposed guidance. In addition, 

we specifically request comment on 

whether: (i) Further disclosure to fund 

investors of the information we suggest 

fund boards should consider would be 

helpful; (ii) any specific disclosure 

should be mandated to better assist 

investors in making informed 

investment decisions; and (iii) the 

public dissemination of particular 

information regarding a fund adviser’s 

portfolio trading practices would have 

an adverse impact on the fund adviser’s 

relationships with the broker-dealers 

that execute fund portfolio transactions. 

We also request comment on whether 

we should again consider proposing to 

require investment advisers to provide 

their clients with customized 

information about how their individual 

brokerage is being used. If so, what 

types of information would be useful 

and in what detail? Should the 

information provided be different for 

institutional and non-institutional 

clients? Do institutional clients already 

require their advisers to provide 

information to them about soft dollars 

on a regular basis, and if so, what kind 

of information do they receive? What 

are the cost implications of requiring 

individual client reports? 

V. Solicitation of Additional Comments 

In addition to the areas for comment 

identified above, we are interested in 

any other issues that commenters may 

wish to address relating to fund board 

oversight of advisers’ portfolio trading 

practices. Please be as specific as 

possible in your discussion and analysis 

of any additional issues. 

By the Commission. 

Dated: July 30, 2008. 

Florence E. Harmon, 

Acting Secretary. 

[FR Doc. E8–18035 Filed 8–5–08; 8:45 am] 

BILLING CODE 8010–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[REG–102822–08] 

RIN 1545–BH54 

Section 108 Reduction of Tax 

Attributes for S Corporations 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Notice of proposed rulemaking 

and notice of public hearing. 

SUMMARY: This document contains 

proposed regulations that provide 

guidance on the manner in which an S 

corporation reduces its tax attributes 

under section 108(b) for taxable years in 

which the S corporation has discharge 

of indebtedness income that is excluded 

from gross income under section 108(a). 

In particular, the regulations address 

situations in which the aggregate 

amount of the shareholders’ disallowed 

section 1366(d) losses and deductions 

that are treated as a net operating loss 

tax attribute of the S corporation 

exceeds the amount of the S 

corporation’s excluded discharge of 

indebtedness income. The proposed 

regulations will affect S corporations 

and their shareholders. This document 

also provides notice of a public hearing 

on these proposed regulations. 

DATES: Written and electronic comments 

must be received by November 4, 2008. 

Outlines of topics to be discussed at the 

public hearing scheduled for December 

8, 2008, must be received by November 

4, 2008. 

ADDRESSES: Send submissions to 

CC:PA:LPD:PR (REG–102822–08), Room 

5203, Internal Revenue Service, PO Box 

7604, Ben Franklin Station, Washington, 

DC 20044. Submissions may be handdelivered Monday through Friday 

between the hours of 8 a.m. and 4 p.m. 

to CC:PA:LPD:PR (REG–102822–08), 

Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically via the Federal 

eRulemaking Portal at 

www.regulations.gov/ (IRS REG–

102822–08). The public hearing will be 

held in the IRS Auditorium, Internal 

Revenue Building, 1111 Constitution 

Avenue, NW., Washington, DC. 


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Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules 45657 

FOR FURTHER INFORMATION CONTACT: 

Concerning the proposed regulations, 

Jennifer N. Keeney, (202) 622–3060; 

concerning submissions of comments, 

the hearing, or to be placed on the 

building access list to attend the 

hearing, Funmi Taylor, (202) 622–7180 

(not toll-free numbers). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collections of information 

contained in this notice of proposed 

rulemaking have been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)). Comments on the 

collections of information should be 

sent to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collection of 

information should be received by 

November 4, 2008. Comments are 

specifically requested concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Internal Revenue Service, including 

whether the information will have 

practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information; 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collections of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchase of service to provide 

information. 

The collection of information in these 

proposed regulations is in § 1.108–

7(d)(4). This information must be 

provided by both the S corporations that 

exclude discharge of indebtedness 

income from gross income under section 

108(a) and the shareholders of those S 

corporations. The information will be 

used by the S corporation to properly 

reduce its tax attributes under section 

108(b), and the information will be used 

by the shareholders of S corporations to 

calculate their taxable income in 

succeeding taxable years. The 

respondents will be S corporations and 

their shareholders. 

Estimated total annual reporting 

burden: 1,000 hours. 

Estimated average annual burden 

hours per respondent: 1 hour. 

Estimated number of respondents: 

1,000. 

Estimated annual frequency of 

responses: On occasion. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and return information are 

confidential, as required by 26 U.S.C. 

6103. 

Background 

This document contains proposed 

amendments to 26 CFR part 1 under 

section 108 of the Internal Revenue 

Code (Code). Section 61(a) provides that 

gross income means all income from 

whatever source derived, including (but 

not limited to) income from discharge of 

indebtedness, also known as 

cancellation of debt (COD income). 

Section 108(a) provides an exclusion 

from gross income for COD income if 

the discharge occurs while the taxpayer 

is bankrupt or insolvent, or if the 

indebtedness discharged is qualified 

farm indebtedness, certain qualified real 

property business indebtedness, or 

certain qualified principal residence 

indebtedness. In the case of a discharge 

of indebtedness during insolvency, the 

exclusion from income is limited to the 

amount by which the taxpayer is 

insolvent. Section 108(b) provides that 

the taxpayer must reduce certain 

specified tax attributes to the extent 

COD income is excluded under section 

108(a)(1)(A), (B), or (C). Section 108(b) 

also provides the order in which these 

tax attributes must be reduced. Unless 

the taxpayer makes an election under 

section 108(b)(5) to first reduce the basis 

of depreciable property, section 

108(b)(2)(A) provides that the first tax 

attribute to be reduced is any net 

operating loss for the taxable year of the 

discharge, and any net operating loss 

carryover to such taxable year. 

Explanation of Provisions 

A. Allocation of Excess Losses and 

Deductions After Section 108(b) Tax 

Attribute Reduction 

Section 108 provides special rules for 

an S corporation that has COD income. 

Section 108(d)(7)(A), as amended by the 

Job Creation and Worker Assistance Act 

of 2002, Public Law 107–147, provides, 

in part, that the rules under section 

108(a) for the exclusion of COD income 

and under section 108(b) for the 

reduction of tax attributes are applied at 

the corporate level, including by not 

taking into account under section 

1366(a) any amount excluded under 

section 108(a). Therefore, if an S 

corporation excludes COD income from 

its gross income under section 108(a), 

the amount excluded is applied to 

reduce the S corporation’s tax attributes 

under section 108(b)(2). Under section 

108(b)(4)(A), the reduction of tax 

attributes occurs after the S 

corporation’s items of income, loss, 

deduction and credit for the taxable year 

of the discharge pass through to its 

shareholders under section 1366(a). 

Under section 1366(d)(1), the aggregate 

amount of losses and deductions a 

shareholder can take into account under 

section 1366(a) cannot exceed the 

shareholder’s adjusted basis in the 

shareholder’s stock in the S corporation 

and the shareholder’s adjusted basis of 

any indebtedness of the S corporation to 

the shareholder. For purposes of the tax 

attribute reduction rule under section 

108(b)(2), any loss or deduction that is 

disallowed for the taxable year of the 

discharge under section 1366(d)(1) is 

treated as a net operating loss of the S 

corporation under section 108(d)(7)(B) 

(deemed NOL). The proposed 

regulations clarify that the S 

corporation’s deemed NOL includes all 

losses and deductions disallowed under 

section 1366(d)(1) for the taxable year of 

the discharge, including disallowed 

losses and deductions of a shareholder 

that had transferred all of the 

shareholder’s stock in the S corporation 

during such year. 

If the amount of the S corporation’s 

deemed NOL exceeds the amount of 

excluded COD income, the proposed 

regulations provide that the S 

corporation’s excess deemed NOL is 

allocated to the shareholder or 

shareholders of the S corporation as 

losses and deductions disallowed under 

section 1366(d)(1) for the taxable year of 

the discharge. If an S corporation has 

more than one shareholder during the 

taxable year of the discharge, the 

proposed regulations provide a rule for 

determining the amount of excess 

deemed NOL allocated to each 

shareholder. The allocation rule in the 

proposed regulations takes into account 

the amount of each shareholder’s 

disallowed losses or deductions under 

section 1366(d)(1) (before the tax 

attribute reduction under section 

108(b)(2)) and the amount of excluded 


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45658 Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules 

COD income that would have been 

taken into account by each shareholder 

under section 1366(a) had the COD 

income not been excluded under section 

108(a). This allocation method 

alleviates, within the parameters of 

section 108(d)(7)(B), the disparate 

treatment that could occur where the 

shareholders’ respective disallowed 

losses or deductions under section 

1366(d)(1) that are treated as the S 

corporation’s deemed NOL are 

disproportionate to the shareholders’

respective ownership interests. The IRS 

and the Treasury Department recognize 

that shareholders may be 

disproportionately impacted where the 

shareholders’ respective disallowed 

losses or deductions are 

disproportionate to their respective 

ownership interests. The IRS and the 

Treasury Department request comments 

on alternative mechanisms that could 

address such disproportionate economic 

effects and on the collateral 

consequences of such mechanisms. 

The proposed regulations also provide 

that any amount of the S corporation’s 

excess deemed NOL that is allocated 

under this allocation method to a 

shareholder that had transferred all of 

the shareholder’s stock in the S 

corporation during the year of the 

discharge is treated as a disallowed loss 

or deduction that is permanently 

disallowed under § 1.1366–2(a)(5) of the 

Income Tax Regulations, unless the 

transfer is described in section 1041(a). 

B. Character of Excess Deemed NOL 

Allocated to a Shareholder 

A shareholder’s losses or deductions 

disallowed under section 1366(d)(1) 

consist of a pro rata share of the total 

losses and deductions allocated to the 

shareholder under section 1366(a) 

during the corporation’s taxable year 

(including losses and deductions 

disallowed under section 1366(d)(1) for 

prior years that are treated as current 

year losses and deductions with respect 

to the shareholder under section 

1366(d)(2)). The character of any item 

included in a shareholder’s pro rata 

share under section 1366(a) is 

determined as if such item were realized 

directly from the source from which it 

was realized by the S corporation, or 

incurred in the same manner as 

incurred by the corporation. The items 

of income, loss, or deduction that pass 

through to a shareholder, and that 

comprise a shareholder’s suspended 

loss or deduction under section 

1366(d)(1), retain their character (for 

example, ordinary deduction, long-term 

capital loss). 

Section 108(d)(7)(B) does not address 

potential character differences that may 

exist in a shareholder’s disallowed 

losses or deductions under section 

1366(d)(1) that are included in the S 

corporation’s deemed NOL. Under the 

general rules of section 108(b)(2), a 

taxpayer’s net operating loss is reduced 

before any other tax attributes, such as 

capital loss carryovers. Therefore, to be 

consistent with the ordering rule in 

section 108(b)(2), the proposed 

regulations provide that in determining 

the character of the amount of the S 

corporation’s excess deemed NOL that 

is allocated to a shareholder, any 

ordinary loss or deduction that was 

disallowed under section 1366(d)(1) and 

that was included in the S corporation’s 

deemed NOL is treated as reduced 

before any capital loss that was 

disallowed under section 1366(d)(1) and 

that was included in the S corporation’s 

deemed NOL. With respect to section 

1231 losses, where it is uncertain 

whether the loss ultimately will be 

characterized as ordinary or capital, the 

proposed regulations provide that any 

section 1231 loss or deduction that was 

disallowed under section 1366(d)(1) and 

that was included in the S corporation’s 

deemed NOL is treated as reduced after 

any ordinary loss and before any capital 

loss. 

C. Information Sharing Requirements 

An S corporation shareholder 

determines the amount of any 

suspended loss or deduction under 

section 1366(d)(1) for a taxable year. If 

the shareholder has a suspended loss or 

deduction under section 1366(d)(1), the 

shareholder maintains a record of the 

carryover loss or deduction amount. 

Because any suspended loss or 

deduction under section 1366(d)(1) is 

treated as a net operating loss of the S 

corporation for purposes of the tax 

attribute reduction rule under section 

108(b)(2), the S corporation will need to 

know the amount of each shareholder’s 

suspended loss or deduction under 

section 1366(d)(1). The proposed 

regulations require shareholders of an S 

corporation that excludes COD income 

from its gross income in a taxable year 

to provide this information to the S 

corporation. In addition, because each 

shareholder will need to know the 

amount of the shareholder’s disallowed 

losses or deductions remaining after the 

tax attribute reduction, the proposed 

regulations require the S corporation to 

provide to its shareholders the amount 

of any excess deemed NOL that is 

allocated to a shareholder after the tax 

attribute reduction, even if such amount 

is zero. The IRS and the Treasury 

Department request comments on 

whether the information sharing 

requirements in the proposed 

regulations are necessary or overly 

burdensome and on whether special 

rules are needed if shareholders fail to 

provide the required information to the 

S corporation. 

Proposed Effective Date 

These regulations are proposed to 

apply to discharges of indebtedness 

occurring on or after the date these 

regulations are published as final 

regulations in the Federal Register. 

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 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations. It is hereby 

certified that the collection of 

information contained in these 

regulations will not have a significant 

economic impact on a substantial 

number of small entities. This 

certification is based on the fact that the 

collection burden imposed on S 

corporations and their shareholders is 

minimal in that it requires S 

corporations and their shareholder(s) to 

share information that shareholders 

already maintain to determine their 

respective tax liability. Moreover, it 

should take an S corporation or a 

shareholder no more than one hour to 

satisfy the information sharing 

requirements in these regulations. 

Finally, the collection burden imposed 

applies only to S corporations that are 

required to reduce their tax attributes 

under section 108(b) of the Code—a 

group estimated to be less than 1 

percent of all existing S corporations. 

Therefore, a regulatory flexibility 

analysis under the Regulatory 

Flexibility Act (5 U.S.C. chapter 6) is 

not required. 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 Public Hearing 

Before these 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 the 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. 


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Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules 45659 

A public hearing has been scheduled 

for December 8, 2008, beginning at 10 

a.m. in the auditorium of the Internal 

Revenue Building, 1111 Constitution 

Avenue, NW., Washington, DC. Due to 

building security procedures, visitors 

must enter at the Constitution Avenue 

entrance. In addition, all visitors must 

present photo identification to enter the 

building. Because of access restrictions, 

visitors will not be admitted beyond the 

Internal Revenue Building lobby more 

than 30 minutes before the hearing 

starts. For information about having 

your name placed on the building 

access list to attend the hearing, see the 

FOR FURTHER INFORMATION CONTACT

section of this preamble. 

The rules of 26 CFR 601.601(a)(3) 

apply to the hearing. Persons who wish 

to present oral comments at the hearing 

must submit written or electronic 

comments by November 4, 2008 and 

submit an outline of the topics to be 

discussed and the time to be devoted to 

each topic (signed original and eight (8) 

copies) by November 4, 2008. A period 

of 10 minutes will be allotted to each 

person for making comments. An 

agenda showing the schedule of 

speakers will be prepared after the 

deadline for receiving outlines has 

passed. Copies of the agenda will be 

available free of charge at the hearing. 

Drafting Information 

The principal author of these 

regulations is Jennifer N. Keeney, Office 

of the Associate Chief Counsel 

(Passthroughs and Special Industries). 

However, other personnel from the IRS 

and the Treasury Department 

participated in their 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 1.108–7 is amended 

by: 

1. Redesignating paragraphs (d) and 

(e) as paragraphs (e) and (f), 

respectively. 

2. Adding new paragraph (d). 

3. Adding paragraph (e) Example 5 

and Example 6 to newly-redesignated 

paragraph (e). 

4. Revising newly-redesignated 

paragraph (f). 

The additions and revision read as 

follows: 

§ 1.108–7 Reduction of attributes. 

* * * * * 

(d) Special rules for S corporations—

(1) In general. If an S corporation 

excludes COD income from gross 

income under section 108(a)(1)(A), (B), 

or (C), the amount excluded shall be 

applied to reduce the S corporation’s tax 

attributes under paragraph (a)(1) of this 

section. For purposes of paragraph 

(a)(1)(i) of this section, the aggregate 

amount of the shareholders’ losses or 

deductions that are disallowed for the 

taxable year of the discharge under 

section 1366(d)(1), including disallowed 

losses or deductions of a shareholder 

that transfers all of the shareholder’s 

stock in the S corporation during the 

taxable year of the discharge, is treated 

as the net operating loss tax attribute 

(deemed NOL) of the S corporation for 

the taxable year of the discharge. 

(2) Allocation of excess losses or 

deductions—(i) In general. If the amount 

of an S corporation’s deemed NOL 

exceeds the amount of the S 

corporation’s COD income that is 

excluded from gross income under 

section 108(a)(1)(A), (B), or (C), the 

excess deemed NOL shall be allocated 

to the shareholder or shareholders of the 

S corporation as a loss or deduction that 

is disallowed under section 1366(d) for 

the taxable year of the discharge. 

(ii) Multiple shareholders—(A) In 

general. If an S corporation has multiple 

shareholders, to determine the amount 

of the S corporation’s excess deemed 

NOL to be allocated to each shareholder 

under paragraph (d)(2)(i) of this section, 

calculate with respect to each 

shareholder the shareholder’s excess 

amount. The shareholder’s excess 

amount is the amount (if any) by which 

the shareholder’s losses or deductions 

disallowed under section 1366(d)(1) 

(before any reduction under paragraph 

(a)(1) of this section) exceed the amount 

of COD income that would have been 

taken into account by that shareholder 

under section 1366(a) had the COD 

income not been excluded under section 

108(a). 

(B) Shareholders with a shareholder’s 

excess amount. Each shareholder that 

has a shareholder’s excess amount, as 

determined under paragraph 

(d)(2)(ii)(A) of this section, is allocated 

an amount equal to the S corporation’s 

excess deemed NOL multiplied by a 

fraction, the numerator of which is the 

shareholder’s excess amount and the 

denominator of which is the sum of all 

shareholders’ excess amounts. 

(C) Shareholders with no 

shareholder’s excess amount. If a 

shareholder does not have a 

shareholder’s excess amount as 

determined in paragraph (d)(2)(ii)(A) of 

this section, none of the S corporation’s 

excess deemed NOL shall be allocated 

to that shareholder. 

(iii) Terminating shareholder. Any 

amount of the S corporation’s excess 

deemed NOL allocated under paragraph 

(d)(2) of this section to a shareholder 

that had transferred all of the 

shareholder’s stock in the corporation 

during the taxable year of the discharge 

is permanently disallowed under 

§ 1.1366–2(a)(5), unless the transfer of 

stock is described in section 1041(a). If 

the transfer of stock is described in 

section 1041(a), the amount of the S 

corporation’s excess deemed NOL 

allocated to the transferor under 

paragraph (d)(2) of this section shall be 

treated as a loss or deduction incurred 

by the corporation in the succeeding 

taxable year with respect to the 

transferee. See section 1366(d)(2)(B). 

(3) Character of excess losses or 

deductions allocated to a shareholder. 

In determining the character of the 

amount of the S corporation’s excess 

deemed NOL allocated to a shareholder 

under paragraph (d)(2) of this section, 

any ordinary loss or deduction that was 

included in the shareholder’s aggregate 

amount of disallowed losses or 

deductions under section 1366(d)(1) is 

treated as reduced under section 108(b) 

before any section 1231 loss that was 

included in the shareholder’s aggregate 

amount of disallowed losses or 

deductions under section 1366(d)(1), 

and any section 1231 loss is treated as 

reduced under section 108(b) before any 

capital loss that was included in the 

shareholder’s aggregate amount of 

disallowed losses or deductions under 

section 1366(d)(1). 

(4) Information requirements. If an S 

corporation excludes COD income from 

gross income under section 108(a) for a 

taxable year, each shareholder of the S 

corporation during the taxable year of 

the discharge must provide to the S 

corporation the amount of the 

shareholder’s losses and deductions that 

are disallowed for the taxable year of the 

discharge under section 1366(d)(1). The 

S corporation must provide to each 

shareholder the amount of any of the S 

corporation’s excess deemed NOL that 

is allocated to that shareholder under 

paragraph (d)(2) of this section, even if 

that amount is zero. 

(e) * * * 

Example 5. (i) Facts. During the entire 

calendar year 2008, A, B, and C each own 

equal shares of stock in X, a calendar year S 

corporation. As of December 31, 2008, A, B, 


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45660 Federal Register / Vol. 73, No. 152 / Wednesday, August 6, 2008 / Proposed Rules 

and C each have a zero stock basis and X 

does not have any indebtedness to A, B, or 

C. For the 2008 taxable year, X excludes from 

gross income $30,000 of COD income under 

section 108(a)(1)(A). The COD income (had it 

not been excluded) would have been 

allocated $10,000 to A, $10,000 to B, and 

$10,000 to C under section 1366(a). For the 

2008 taxable year, X has $30,000 of losses 

and deductions that X passes through prorata to A, B, and C in the amount of $10,000 

each. The losses and deductions that pass 

through to A, B, and C are disallowed under 

section 1366(d)(1). In addition, B has $10,000 

of section 1366(d) losses from prior years and 

C has $20,000 from prior years. A’s ($10,000), 

B’s ($20,000) and C’s ($30,000) combined 

$60,000 of disallowed losses and deductions 

for the taxable year of the discharge are 

treated as a current year net operating loss 

tax attribute for X under section 108(d)(7)(B) 

(deemed NOL) for purposes of the section 

108(b) reduction of tax attributes. 

(ii) Allocation. Under section 108(b)(2)(A), 

X’s $30,000 of excluded COD income reduces 

this $60,000 deemed NOL to $30,000. 

Therefore, X has a $30,000 excess net 

operating loss (excess deemed NOL) to 

allocate to the shareholders. Under paragraph 

(d)(2)(ii)(C) of this section, none of the 

$30,000 excess deemed NOL is allocated to 

A because A’s section 1366(d) losses and 

deductions immediately prior to the section 

108(b)(2)(A) reduction ($10,000) do not 

exceed A’s share of the excluded COD 

income for 2008 ($10,000). Thus, A has no 

shareholder’s excess amount. Each of B’s and 

C’s respective section 1366(d) losses and 

deductions immediately prior to the section 

108(b)(2)(A) reduction exceed each of B’s and 

C’s respective shares of the excluded COD 

income for 2008. B’s excess amount is 

$10,000 ($20,000 ¥ $10,000) and C’s excess 

amount is $20,000 ($30,000 ¥ $10,000). 

Therefore, the total of all shareholders’

excess amounts is $30,000. Under paragraph 

(d)(2) of this section, X will allocate $10,000 

of the $30,000 excess deemed NOL to B 

($30,000 × $10,000/$30,000) and $20,000 of 

the $30,000 excess deemed NOL to C 

($30,000 × $20,000/$30,000). These amounts 

are treated as losses and deductions 

disallowed under section 1366(d)(1) for the 

taxable year of the discharge. Accordingly, at 

the beginning of 2009, A has no section 

1366(d)(2) carryovers, B has $10,000 of 

carryovers, and C has $20,000 of carryovers. 

(iii) Character. Immediately prior to the 

section 108(b)(2)(A) reduction, B’s $20,000 of 

section 1366(d) losses and deductions 

consisted of $8,000 of long-term capital 

losses, $7,000 of section 1231 losses, and 

$5,000 of ordinary losses. After the section 

108(b)(2)(A) tax attribute reduction, X will 

allocate $10,000 of the excess deemed NOL 

to B. Under paragraph (d)(3) of this section, 

the $5,000 of ordinary losses are treated as 

reduced first, followed by $5,000 of section 

1231 losses. Accordingly, the $10,000 of 

losses allocated to B consist of the remaining 

$2,000 of section 1231 losses and $8,000 of 

long-term capital losses. As a result, at the 

beginning of 2009, B’s $10,000 of section 

1366(d)(2) carryovers include $2,000 of 

section 1231 losses and $8,000 of long-term 

capital losses. 

Example 6. (i) A and B each own 50 

percent of the shares of stock in X, a calendar 

year S corporation. On June 30, 2008, A sells 

all of her shares of stock in X to C in a 

transfer not described in section 1041(a). For 

the 2008 taxable year, X excludes from gross 

income $12,000 of COD income under 

section 108(a)(1)(A). The COD income (had it 

not been excluded) would have been 

allocated $3,000 to A, $6,000 to B, and 

$3,000 to C under section 1366(a). Prior to 

the section 108(b)(2)(A) reduction, for the 

taxable year of the discharge the shareholders 

have disallowed losses and deductions under 

section 1366(d) (including disallowed losses 

carried over to the current year under section 

1366(d)(2)) in the following amounts: A—

$9,000, B—$9,000, and C—$2,000. These 

combined $20,000 of disallowed losses and 

deductions for the taxable year of the 

discharge are treated as a current year net 

operating loss tax attribute for X under 

section 108(d)(7)(B) (deemed NOL). 

(ii) Under section 108(b)(2)(A), X’s $12,000 

of excluded COD income reduces the $20,000 

deemed NOL to $8,000. Therefore, X has an 

$8,000 excess net operating loss (excess 

deemed NOL) to allocate to the shareholders. 

Under paragraph (d)(2)(ii)(C) of this section, 

none of the $8,000 excess deemed NOL is 

allocated to C because C’s section 1366(d) 

losses and deductions immediately prior to 

the section 108(b)(2)(A) reduction ($2,000) do 

not exceed C’s share of the excluded COD 

income for 2008 ($3,000). However, each of 

A’s and B’s respective section 1366(d) losses 

and deductions immediately prior to the 

section 108(b)(2)(A) reduction exceed each of 

A’s and B’s respective shares of the excluded 

COD income for 2008. A’s excess amount is 

$6,000 ($9,000¥$3,000) and B’s excess 

amount is $3,000 ($9,000¥$6,000). 

Therefore, the total of all shareholders’

excess amounts is $9,000. Under paragraph 

(d)(2) of this section, X will allocate $5,333 

of the $8,000 excess deemed NOL to A 

($8,000 × $6,000/$9,000) and $2,667 of the 

$8,000 excess deemed NOL to B ($8,000 × 

$3,000/$9,000). However, because A 

transferred all of her shares of stock in X in 

a transaction not described in section 

1041(a), A’s $5,333 of section 1366(d) losses 

and deductions are permanently disallowed 

under paragraph (d)(2)(iii) of this section. 

Accordingly, at the beginning of 2009, B has 

$2,667 of section 1366(d)(2) carryovers and C 

has no section 1366(d)(2) carryovers. 

(f) Effective/applicability date—(1) 

Paragraphs (a), (b), (c), and Examples 1, 

2, 3, and 4 of paragraph (e) of this 

section apply to discharges of 

indebtedness occurring on or after May 

10, 2004. 

(2) Paragraph (d) and Examples 5 and 

6 of paragraph (e) of this section apply 

to discharges of indebtedness occurring 

on or after the date that these 

regulations are published as final 

regulations in the Federal Register. 

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

[FR Doc. E8–17952 Filed 8–5–08; 8:45 am] 

BILLING CODE 4830–01–P 

FEDERAL MEDIATION AND 

CONCILIATION SERVICE 

29 CFR Part 1404 

RIN 3076–AA12 

Arbitration Services 

AGENCY: Federal Mediation and 

Conciliation Service. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Federal Mediation and 

Conciliation Service (FMCS) proposes to 

amend its rules relating to arbitrators’

inactive status, removal, appointment, 

referral and obligation to provide FMCS 

with information. The proposed rules 

also address the appointment of 

arbitrators where a party has failed to 

pay fees in previous cases. In addition, 

the proposed rules raise the annual 

listing fee for arbitrators on the FMCS 

Roster. The changes will promote more 

efficient and effective procedures 

involving arbitrator retention and 

arbitration services. The increased cost 

of listing arbitrator biographical data 

more accurately reflects FMCS’ costs of 

maintaining and administering this 

information. 

DATES: Comments must be submitted to 

the office listed in the address section 

below on or before October 6, 2008. 

ADDRESSES: Submit written comments, 

identified by RIN number, by mail to 

Vella M. Traynham, Director, Office of 

Arbitration Services, FMCS, 2100 K 

Street, NW., Washington, DC 20427. 

Comments may be submitted by fax to 

(202) 606–3749. Comments may also be 

submitted electronically to 

vtraynham@fmcs.gov. All comments 

will be available for inspection in Room 

704 at the Washington, DC address 

above from 8:30 a.m. to 4:30 p.m. 

Monday through Friday, excluding legal 

holidays. 

FOR FURTHER INFORMATION CONTACT: 

Vella M. Traynham, Director, Office of 

Arbitration Services, FMCS, 2100 K 

Street, NW., Washington, DC 20427. 

Telephone: (202) 606–5111. 

SUPPLEMENTARY INFORMATION: Pursuant 

to 29 U.S.C. 171(b) and 29 CFR Part 

1404, FMCS maintains a Roster of 

qualified labor arbitrators to hear 

disputes arising from collective 

bargaining agreements and to provide 

fact finding and interest arbitration. 

FMCS proposes to amend its rules 

pertaining to arbitration services by 

revising: the arbitrator complaint 

process; circumstances applicable to 

inactive arbitrator status; procedures for 

the request of arbitration panels; the 

obligation of arbitrators to provide 

FMCS with designated information; and 


yshivers on PROD1PC62 with PROPOSALS