Final Rules Issued on Accelerated Recognition of Deferred COD Income
The IRS issued final regulations on the rules to accelerate cancellation of debt (COD) income that taxpayers elected to defer over a five-year period when an applicable debt instrument was reacquired by the issuer or a related party in 2009 or 2010 (T.D. 9622 and T.D. 9623). An applicable debt instrument is one issued by a C corporation or any other person in connection with a trade or business that person conducts (Sec. 108(i)(3)).
These deferral rules were enacted by the American Recovery and Reinvestment Act of 2009, P.L. 111-5, to assist businesses having difficulties during the recession. Once an acceleration event occurs, however, taxpayers that elected to defer this income must recognize it. The regulations the IRS issued govern those accelerations.
T.D. 9622, which contains the rules that apply to C corporations, finalizes without any substantive changes temporary regulations (T.D. 9497) issued in 2010, while T.D. 9623 finalizes temporary rules (T.D. 9498) that apply to S corporations and partnerships, with some changes from the temporary regulations.
The regulations under T.D. 9622 require acceleration of deferred COD income by C corporations where the corporation:
- Changes its tax status;
- Ceases its corporate existence in a transaction to which Sec. 381(a) (corporate acquisition rules) does not apply; or
- Engages in a transaction that impairs its ability to pay the tax liability associated with the deferred COD income.
Changes in the final regulations under T.D. 9623 include an example of how Sec. 108(i)(6) applies when partners must recognize deferred amounts under Sec. 752(b). The other change is to a section that excepts from the acceleration rules certain distributions to provide that the exception will not apply if the electing partnership has terminated.
IRS Issues Guidance on Minimum Essential Health Coverage, Shared-Responsibility Penalty
The IRS this summer issued Notice 2013-41, which defines minimum essential coverage under certain government health plans and other coverage for purposes of the Sec. 36B premium tax credit, and Notice 2013-42, which provides relief from the shared-responsibility penalty under Sec. 5000A for individuals who are eligible for coverage in plans that are not on a calendar year.
Notice 2013-41 announces newly finalized regulations published by the secretary of Health and Human Services (HHS) on June 26, which state that high-risk pools and self-funded health coverage that universities offer to students qualify as minimum essential coverage for a one-year transitional period in 2014. For plan years beginning on or after Jan. 1, 2015, sponsors of these plans must apply to HHS to have their coverage recognized as minimum essential coverage.
The notice also explains that individuals who qualify for the Children’s Health Insurance Program (CHIP) or Medicaid, both of which require participants in some states to pay premiums, are considered not eligible for health coverage subsidized by the premium tax credit during the “lockout” period during which they are not eligible to re-enroll in either program after they have failed to pay their premiums. However, individuals who are not eligible for CHIP because they must wait out an eligibility period are treated as not eligible for minimum essential coverage and therefore qualify for the tax credit.
In addition, the notice addresses coverage under certain government programs including Medicaid or Medicare.
Individuals also are considered to have minimum essential coverage under the following health care plans:
- Medicare Part A coverage that requires premium payments;
- State high-risk pools;
- Student health plans; and
- TRICARE military coverage.
For individuals whose employers’ health insurance plans are not on a calendar year, Notice 2013-42 provides transitional relief from the shared-responsibility penalty under Sec. 5000A if the employee chooses not to enroll in the employer's plan for the 2013–2014 plan year.
Noted in Passing
The IRS will no longer issue “comfort ruling” letters in most cases on whether transactions qualify for nonrecognition treatment under Sec. 332, 351, 355, or 1036 or as tax-free reorganizations under Sec. 368. Rev. Proc. 2013-32, issued June 25, stated that to conserve agency resources, the IRS is restricting such letter rulings to those involving “significant issues.” The revenue procedure did not define or give an example of a significant issue for this purpose, but it stated a change of circumstances arising after a transaction has been completed would not ordinarily be a significant issue, nor would most issues of fact that do not also present an issue of law. The revenue procedure amplifies and modifies Rev. Procs. 2013-1 and 2013-3 and applies to all ruling requests postmarked or, if not mailed, received after Aug. 23, 2013.
The AICPA Tax Executive Committee, in comments on proposed regulations (REG-130507-11) for the Sec. 1411 net investment income tax, made several general recommendations and 16 detailed ones suggesting areas for clarification and additional guidance. They include how to determine when income is derived “in the ordinary course of a trade or business” and thus exempt from application of the 3.8% tax. The letter is available at tinyurl.com/pdqjf3b.
The Eleventh Circuit affirmed the Tax Court’s holding that a poultry processor could not unilaterally change its purchase price allocations from two asset purchase agreements to allocations from a later cost-segregation study (Peco Foods, Inc., No. 12-12169 (11th Cir. 7/2/13), aff’g T.C. Memo. 2012-18; discussed in “Side Effects of Cost Segregation,” JofA, April 2012, page 48).