In Revenue Procedure 2009-37, the IRS has provided guidance to taxpayers on how to make the new election to defer recognizing cancellation of debt (COD) income under IRC § 108(i). The revenue procedure also requires taxpayers who make the election annually to provide additional information on their returns, starting with the tax year after they make the election. The IRS also warned taxpayers that it intends to issue further guidance, including perhaps regulations, that may apply retroactively.
Section 108(i) allows taxpayers to make an election to defer COD income arising from a cancellation, reacquisition or modification of a business debt occurring after Dec. 31, 2008, and before Jan. 1, 2011, and to include the COD in income ratably over a five-year period beginning in 2014.
To make the election, the taxpayer must attach to its timely filed original federal tax return for the tax year during which the cancellation, reacquisition or modification of the debt occurs a statement meeting the requirements spelled out in the revenue procedure. The IRS is granting an automatic 12-month extension to make the election (under the rules in Regs. Sec. 301.9100-2(a)).
Taxpayers may elect to defer recognizing only a portion of their eligible COD income and may make the election (or not) on a debt-instrument-by-debt-instrument basis. According to the revenue procedure, the common parent of a consolidated group will make the election on behalf of all members of the group.
In addition to the original election statement, taxpayers making the election must also attach annual information statements to their subsequent returns, starting with the tax year after they make the election. Section 5 of the revenue procedure spells out in detail what the annual information statements must contain.