The IRS issued temporary and proposed regulations Wednesday relating to taxpayer elections to defer recognition of cancellation of debt (COD) income.
The American Recovery and Reinvestment Act of 2009 (ARRA, PL 111-5) enacted IRC § 108(i), providing an election to defer COD income arising from the forgiveness or reacquisition of certain debt instruments occurring between Jan. 1, 2009, and Dec. 31, 2010. A taxpayer making the election may include COD income in gross income ratably over a five-year period beginning with the fourth or fifth tax year after the reacquisition occurred (in 2010 or 2009 tax years, respectively). If a taxpayer making a section 108(i) deferral election dies or ceases business, or substantially all the assets of the taxpayer are liquidated or sold, any remaining deferred COD income or OID deductions must be included in gross income or taken in the tax year in which any of those events occurred. In a Title 11 bankruptcy case, the deferred COD income is taken into account on the day before the petition is filed (section 108(i)(5)(D)).

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