The Internal Revenue Service has released final regulations relating to the exclusion from gross income of discharge of indebtedness income of a grantor trust or an entity that is disregarded as an entity separate from its owner.
The final regulations provide rules regarding the term “taxpayer” for purposes of applying the exclusion from gross income of discharge of indebtedness income of a grantor trust or a disregarded entity. The rules affect grantor trusts, disregarded entities and their owners.
As originally proposed in 2011, the proposed regulations provide that, in the case of a partnership, the owner rules apply at the partner level to the partners to whom the discharge of indebtedness is allocable. For example, if a partnership holds an interest in a grantor trust or a disregarded entity, the applicability of Section 108(a)(1)(A) and (B) of the Tax Code to the discharge of indebtedness income is tested by looking to each partner to whom the income is allocable.
Lastly, the proposed regulations clarify that, subject to the special rule for partnerships under Section 108(d)(6), the insolvency exclusion is available only if the owner is insolvent and the bankruptcy exclusion is available only if the owner is under the bankruptcy court’s jurisdiction.
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