II 

111TH CONGRESS 

1ST SESSION S. 31 

To amend the Internal Revenue Code of 1986 with respect to the proper 

tax treatment of certain indebtedness discharged in 2009 or 2010, and 

for other purposes. 

IN THE SENATE OF THE UNITED STATES 

JANUARY 6, 2009 

Mr. ENSIGN introduced the following bill; which was read twice and referred 

to the Committee on Finance 

A BILL 

To amend the Internal Revenue Code of 1986 with respect 

to the proper tax treatment of certain indebtedness discharged in 2009 or 2010, and for other purposes. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. PROPER TAX TREATMENT OF CERTAIN FINAN4 CIAL INDEBTEDNESS DISCHARGED IN 2009 

5 OR 2010. 

6 (a) IN GENERAL.—Section 108(a)(1) of the Internal 

7 Revenue Code of 1986 (relating to exclusion from gross 

8 income) is amended by striking ‘‘or’’ at the end of sub9 paragraph (D), by striking the period at the end of subVerDate Nov 24 2008 02:16 Jan 07, 2009 Jkt 069200 PO 00000 Frm 00001 Fmt 6652 Sfmt 6201 E:\BILLS\S31.IS S31

jbell on PROD1PC69 with BILLS
2 

•S 31 IS

1 paragraph (E) and inserting ‘‘, or’’ and by adding at the 

2 end the following new subparagraph: 

3 ‘‘(F) the indebtedness discharged is appli4 cable financial indebtedness which is discharged 

5 after December 31, 2008, and before January 

6 1, 2011.’’. 

7 (b) APPLICABLE FINANCIAL INDEBTEDNESS.—Sec8 tion 108 of such Code is amended by adding at the end 

9 the following new subsection: 

10 ‘‘(i) DEFINITIONS AND RULES RELATING TO APPLI11 CABLE FINANCIAL INDEBTEDNESS.—For purposes of sub12 section (a)(1)(F)— 

13 ‘‘(1) APPLICABLE FINANCIAL INDEBTED14 NESS.—The term ‘applicable financial indebtedness’ 

15 means indebtedness— 

16 ‘‘(A) which was originally issued by a cor17 poration, or by a partnership engaged in a 

18 trade or business (other than a trade or busi19 ness of trading in stocks or securities for the 

20 partnership’s own account), and 

21 ‘‘(B) which is— 

22 ‘‘(i) indebtedness originally issued or 

23 syndicated by a financial institution (as de24 fined in section 582(c)(2) without regard 

25 to subparagraph (C) thereof) or a deposiVerDate Nov 24 2008 02:16 Jan 07, 2009 Jkt 069200 PO 00000 Frm 00002 Fmt 6652 Sfmt 6201 E:\BILLS\S31.IS S31

jbell on PROD1PC69 with BILLS
3 

•S 31 IS

1 tory institution holding company (as de2 fined in section 3(w)(1) of the Federal De3 posit Insurance Act (12 U.S.C. 

4 1813(w)(1)), 

5 ‘‘(ii) indebtedness which— 

6 ‘‘(I) constitutes a security within 

7 the meaning of the Securities Act of 

8 1933, and 

9 ‘‘(II) was originally issued pursu10 ant to a registration statement that 

11 was declared effective under such Act 

12 or pursuant to an exemption from, or 

13 in a transaction not subject to, the 

14 registration requirements of such Act, 

15 or 

16 ‘‘(iii) indebtedness that is traded on 

17 an established market (within the meaning 

18 of section 1273(b)(3)). 

19 ‘‘(2) APPLICABLE DISCHARGES.—Subsection 

20 (a)(1)(F) shall only apply to a discharge of applica21 ble financial indebtedness if such discharge is by 

22 reason of— 

23 ‘‘(A) the acquisition of the indebtedness by 

24 the issuer of the indebtedness, 


jbell on PROD1PC69 with BILLS
4 

•S 31 IS

1 ‘‘(B) the acquisition of the indebtedness of 

2 the issuer by a person related, or who becomes 

3 related, to the issuer of the indebtedness from 

4 a person who is not related to the issuer, or 

5 ‘‘(C) the significant modification of the in6 debtedness (within the meaning of section 

7 1001). 

8 For purposes of subparagraph (B), the determina9 tion of whether a person is related to another person 

10 shall be made in the same manner as under sub11 section (e)(4).’’. 

12 (c) COORDINATION OF EXCLUSIONS.—Section 

13 108(a)(2) of such Code is amended— 

14 (1) by striking ‘‘and (E)’’ in subparagraph (A) 

15 and inserting ‘‘(E), and (F)’’, and 

16 (2) by adding at the end the following new sub17 paragraph: 

18 ‘‘(D) FINANCIAL INDEBTEDNESS EXCLU19 SION TAKES PRECEDENCE OVER INSOLVENCY

20 EXCLUSION UNLESS ELECTED OTHERWISE.— 

21 Paragraph (1)(B) shall not apply to a discharge 

22 to which paragraph (1)(F) applies unless the 

23 taxpayer elects to apply paragraph (1)(B) in 

24 lieu of paragraph (1)(F).’’. 


jbell on PROD1PC69 with BILLS
5 

•S 31 IS

1 (d) EARNINGS AND PROFITS.—Section 312(l) of such 

2 Code is amended by adding at the end the following new 

3 paragraph: 

4 ‘‘(3) DISCHARGE OF CERTAIN FINANCIAL IN5 DEBTEDNESS.—The earnings and profits of a cor6 poration shall not include income from a discharge 

7 of indebtedness to which section 108(a)(1)(F) ap8 plies.’’. 

9 (e) OTHER SPECIAL RULES.— 

10 (1) TREATMENT AS MARKET DISCOUNT

11 BOND.—For purposes of the Internal Revenue Code 

12 of 1986, any indebtedness acquired in a transaction 

13 described in section 108(i)(2)(B) of such Code (as 

14 added by subsection (b)), or received pursuant to an 

15 exchange arising from a transaction described in sec16 tion 108(i)(2)(C) of such Code (as so added), shall 

17 be treated as a market discount bond (within the 

18 meaning of section 1278(a)(1) of such Code) having 

19 market discount equal to the amount (if any) which, 

20 but for section 108(a)(1)(F) of such Code (as added 

21 by subsection (a)), would have been includible in 

22 gross income by reason of the discharge of such in23 debtedness in any such transaction. 

24 (2) ACQUISITIONS BY FOREIGN PERSONS.—Any 

25 interest (or original issue discount) paid or accrued 


jbell on PROD1PC69 with BILLS
6 

•S 31 IS

1 after December 31, 2008, and before January 1, 

2 2011, on indebtedness which is described in section 

3 108(a)(1)(F) of such Code by reason of the acquisi4 tion of such indebtedness by a foreign person or by 

5 a partnership (or other pass-through entity) in 

6 which a foreign person is a partner (or other profits 

7 or capital owner) shall not be subject to sections 

8 871(h)(3), 881(c)(3)(B) or 881(c)(3)(C) of such 

9 Code. 

Æ 


jbell on PROD1PC69 with BILLS