SECTION 1. PROPER TAX TREATMENT OF CERTAIN FINANCIAL INDEBTEDNESS 
              DISCHARGED IN 2009 OR 2010.

    (a) In General.--Section 108(a)(1) of the Internal Revenue Code of 
1986 (relating to exclusion from gross income) is amended by striking 
``or'' at the end of subparagraph (D), by striking the period at the 
end of subparagraph (E) and inserting ``, or'' and by adding at the end 
the following new subparagraph:
                    ``(F) the indebtedness discharged is applicable 
                financial indebtedness which is discharged after 
                December 31, 2008, and before January 1, 2011.''.
    (b) Applicable Financial Indebtedness.--Section 108 of such Code is 
amended by adding at the end the following new subsection:
    ``(i) Definitions and Rules Relating to Applicable Financial 
Indebtedness.--For purposes of subsection (a)(1)(F)--
            ``(1) Applicable financial indebtedness.--The term 
        `applicable financial indebtedness' means indebtedness--
                    ``(A) which was originally issued by a corporation, 
                or by a partnership engaged in a trade or business 
                (other than a trade or business of trading in stocks or 
                securities for the partnership's own account), and
                    ``(B) which is--
                            ``(i) indebtedness originally issued or 
                        syndicated by a financial institution (as 
                        defined in section 582(c)(2) without regard to 
                        subparagraph (C) thereof) or a depository 
                        institution holding company (as defined in 
                        section 3(w)(1) of the Federal Deposit 
                        Insurance Act (12 U.S.C. 1813(w)(1)),
                            ``(ii) indebtedness which--
                                    ``(I) constitutes a security within 
                                the meaning of the Securities Act of 
                                1933, and
                                    ``(II) was originally issued 
                                pursuant to a registration statement 
                                that was declared effective under such 
                                Act or pursuant to an exemption from, 
                                or in a transaction not subject to, the 
                                registration requirements of such Act, 
                                or
                            ``(iii) indebtedness that is traded on an 
                        established market (within the meaning of 
                        section 1273(b)(3)).
            ``(2) Applicable discharges.--Subsection (a)(1)(F) shall 
        only apply to a discharge of applicable financial indebtedness 
        if such discharge is by reason of--
                    ``(A) the acquisition of the indebtedness by the 
                issuer of the indebtedness,
                    ``(B) the acquisition of the indebtedness of the 
                issuer by a person related, or who becomes related, to 
                the issuer of the indebtedness from a person who is not 
                related to the issuer, or
                    ``(C) the significant modification of the 
                indebtedness (within the meaning of section 1001).
        For purposes of subparagraph (B), the determination of whether 
        a person is related to another person shall be made in the same 
        manner as under subsection (e)(4).''.
    (c) Coordination of Exclusions.--Section 108(a)(2) of such Code is 
amended--
            (1) by striking ``and (E)'' in subparagraph (A) and 
        inserting ``(E), and (F)'', and
            (2) by adding at the end the following new subparagraph:
                    ``(D) Financial indebtedness exclusion takes 
                precedence over insolvency exclusion unless elected 
                otherwise.--Paragraph (1)(B) shall not apply to a 
                discharge to which paragraph (1)(F) applies unless the 
                taxpayer elects to apply paragraph (1)(B) in lieu of 
                paragraph (1)(F).''.
    (d) Earnings and Profits.--Section 312(l) of such Code is amended 
by adding at the end the following new paragraph:
            ``(3) Discharge of certain financial indebtedness.--The 
        earnings and profits of a corporation shall not include income 
        from a discharge of indebtedness to which section 108(a)(1)(F) 
        applies.''.
    (e) Other Special Rules.--
            (1) Treatment as market discount bond.--For purposes of the 
        Internal Revenue Code of 1986, any indebtedness acquired in a 
        transaction described in section 108(i)(2)(B) of such Code (as 
        added by subsection (b)), or received pursuant to an exchange 
        arising from a transaction described in section 108(i)(2)(C) of 
        such Code (as so added), shall be treated as a market discount 
        bond (within the meaning of section 1278(a)(1) of such Code) 
        having market discount equal to the amount (if any) which, but 
        for section 108(a)(1)(F) of such Code (as added by subsection 
        (a)), would have been includible in gross income by reason of 
        the discharge of such indebtedness in any such transaction.
            (2) Acquisitions by foreign persons.--Any interest (or 
        original issue discount) paid or accrued after December 31, 
        2008, and before January 1, 2011, on indebtedness which is 
        described in section 108(a)(1)(F) of such Code by reason of the 
        acquisition of such indebtedness by a foreign person or by a 
        partnership (or other pass-through entity) in which a foreign 
        person is a partner (or other profits or capital owner) shall 
        not be subject to sections 871(h)(3), 881(c)(3)(B) or 
        881(c)(3)(C) of such Code.
Output: Amends the Internal Revenue Code to allow an exclusion from gross income for income attributable to the discharge of indebtedness relating to securities issued by certain financial entities and discharged after December 31, 2008, and before January 1, 2011.