It is fairly common that related-party indebtedness

April 2013 By Paul C. Lau, Mark Jolley and Kurt Piwko * Tackling Disappearing Debt in Nontaxable Corporate Transactions Part I Paul C. Lau is a Tax Partner in Chicago, Illinois; Mark Jolley is a Tax Partner in Ann Arbor, Michigan; and Kurt Piwko is a Senior Tax Manager in Macomb, Michigan. All are with Plante Moran. It is fairly common that related-party indebtedness is involved in a nontaxable corporate transaction. For example, a shareholder may transfer the debt of a controlled corporation in exchange for stock in a Code Sec. 351 exchange. As a result of the transfer, the debt effectively disappears because the controlled corporation becomes the holder of its own debt. Another example is where a wholly owned subsidiary distributes its assets and liabilities (including liabilities owed to its parent corporation) in complete liquidation under Code Sec. 332. Again, the related-party debt effectively disappears since the debt is extinguished when the parent corporation becomes the obligor and creditor rof such debt. Despite the frequency of nontaxable corporate transactions involving disappearing debts, the income tax treatment of the extinguishment of such debts remains unsettled. There are two basic categories of related-party debts that are extinguished in nontaxable corporate transactions: 1. The debtors transfer the debts to the creditors (herein referred to as the Debtor-to-Creditor Transfers ). 2. The creditors transfer the debts to the debtors (herein referred to as the Creditor-to-Debtor Transfers ). This column explores the current guidance and unsettled issues on the Debtor-to-Creditor Transfers. The next column will address the Creditor-to- Debtor Transfers. TAXES THE TAX MAGAZINE 15

Scope of Discussion Three types of nontaxable corporate transactions are examined in this column: 1. Transfers to controlled corporations under Code Sec. 351 2. Subsidiary liquidations under Code Sec. 332 3. Acquisitive reorganizations under Code Sec. 368(a) The following three potential income tax issues are explored on a debt extinguishment in each of the nontaxable corporate transactions: 1. Whether the debtor is treated as transferring assets to the creditor in repayment of the extinguished debt and is required to recognize gain or loss on such transfer 2. Whether the creditor is required to recognize gain or loss based on the difference between the face amount (or the adjusted issue price) and tax basis in the extinguished debt 3. Whether the debtor or the creditor is required to recognize cancellation of debt (COD) income or a repurchase premium deduction to the extent of the difference between the fair market value (FMV) and the face amount (or the adjusted issue price) of the extinguished debt In broad terms, adjusted issue price, as defined in Code Sec. 1272(a)(4), is the original issue price adjusted for accrued but unpaid original issue discount (OID) and amortization at of any issuance premium. m. In most instances, the face amount of an intercompany debt equals the adjusted dissued price since most intercompany debt is not originally issued at a discount or a premium. We first tackle the income tax consequences s of debt extinguishment based on general income tax principles without regard to consolidated return regulations. General tax principles apply in determining the treatment of a debt extinguishment, unless the extinguished debt is an intercompany obligation within the meaning of the consolidated return regulations. In such cases, the income tax treatment is governed by the consolidated return regulations. The effects of the consolidated return regulations will be examined in the next column. Case Law on Debtors Two cases frequently cited in analyzing Debtorto-Creditor Transfers in nontaxable corporate transactions are A.L. Kniffen 1 and Edwards Motor Transit Co. 2 In both cases, the Tax Court held that the debtor transferor did not recognize income from the transfer of liabilities to the creditor transferee. In Kniffen, an individual transferred the assets and liabilities of his sole proprietorship to his controlled corporation in accordance with Code Sec. 351. The sole proprietorship was indebted to the corporation at the time of the transfer. The value of the assets being transferred exceeded the amount of liabilities owed to the controlled corporation. The aggregate basis of the assets, however, was less than the amount of liabilities transferred. The IRS contended that since the debt was cancelled by operation of law, it amounted to a cancellation of indebtedness and constituted income to the taxpayer as receipt of boot under Code Sec. 351(b). The Tax Court held that where a debtor transfers his debt obligation to his creditor for valid consideration pursuant to a Code Sec. 351 exchange, the interests of the two parties are merged and the debt is immediately extinguished. The court concluded that Code Sec. 357(a) was applicable because the identity of the creditor is irrelevant under Code Sec. 357(a). 3 The liability could not have been discharged had the corporation not first assumed it. Accordingly, the sole proprietor did not recognize any gain on the assumption of liability except to the extent the assumed liability exceeded the basis of transferred assets as provided by Code Sec. 357(c)(1). In Edwards Motor Transit Co., the debtor parent corporation merged into its wholly owned creditor subsidiary in a downstream statutory merger under Code Sec. 368(a)(1)(A). The value of the assets s transferred ed to the subsidiary exceeded eed the amount tof the liabilities i owed dto the subsidiary. sid The IRS agreed that the merger was nontaxable, but contended that the debtor parent corporation recognized income due to the cancellation of debt. The Tax Court, citing Kniffen, held that the debt transfer was not a cancellation of the debt. Specifically, the court stated that [t]he assumption by Edwards (as creditor) of the liabilities of its parent for a valid consideration pursuant to a nontaxable merger of the debtor and creditor corporations results in a recognition of the existence of the debt, a merger of their interests, and a consequent extinguishment of the outstanding indebtedness. Both Kniffen and Edwards held that the transfer of liabilities by the debtors were not cancellations of debt that would result in COD income to the debtors and that the debt was assumed by the 16 2013 CCH. All Rights Reserved.

April 2013 creditors and then extinguished. Code Sec. 357(a) applied and shielded the debtor transferors from income on the debt assumption except to the extent that the liability exceeded the basis of transferred assets, as it did in Kniffen. In Edwards, the application of Code Sec. 357(a) implicitly means that the assumption of the liability was incident to the nontaxable merger. The court stated that [t]he transfer by the parent corporation of its assets to [the subsidiary corporation] constituted payment of the outstanding liability, including the advances in issue, just as surely as if [the parent corporation] has made payment in cash. This statement implies that there was no cancellation of debt from the debtor s standpoint. It also means that the court acknowledged that even in a reorganization transaction, assets may be deemed exchanged in satisfaction of the debt owed to the acquiring corporation. The IRS s view, expressed in GCM 34902, 4 is that such acknowledgment by the court suggested gest that the assumption and extinguishment of the debt constituted repayment that could result in ng gain recognition. Unsettled Issues on Creditors Although hcode Sec. 357(a) applies to limit income recognition for the debtor transferors, it does not govern the tax effects of fthe creditors. In Rev. Rul. 72-464, 5 the acquiring corporation purchased debts of the acquired corporation from unrelated parties at a discount. Subsequently, the acquired corporation merged with and into the acquiring corporation and the debts were extinguished. The ruling held that the acquiring corporation recognized gain on the extinguishment based on the difference between the tax basis of the debt in the hands of the acquiring corporation and the face amount of the debt (i.e., gain equal to the purchase discount). A fact provided in the ruling was that the debt s FMV equaled the face amount at the time of the merger. Apparently, this particular fact was added to cover a disagreement within the IRS. GCM 34902 described the disagreement between the authors of Rev. Rul. 72-464 and the Chief Counsel s Office as follows: Although it is common that debts are extinguished in a nontaxable corporate transaction, the income tax consequences on such debt extinguishment are unsettled. We note, however, that our offices disagree as to the amount received in payment of the obligations where the fair market value of the obligations is less than the face amount of the obligations. You believe that the principle of the priority of creditors over shareholders in a liquidation (Houston Natural Gas Corp. v Commissioner, 173 F. 2d 461 (5th Cir. 1949)) is fully applicable to a reorganization and, therefore, the fair market value of the obligations is irrelevant. We, on the other hand, believe that the amount realized in satisfaction of the indebtedness under section 1001 should be based on the obligations fair market value in those situations where the acquiring corporation is a creditor of the transferor. Since we have been unable to reconcile our differences, it has been agreed that all references to fair market value will be deleted from the ruling In essence, the Chief Counsel s Office believed that there should also be income or loss recognition if the FMV of the debt is different from the face amount of the debt. More than 20 years later, on December 29, 1992, the IRS issued Reg. 1.108-2 under Code Sec. 108(e)(4) 6 on the income tax treatment of debt when a debtor s indebtedness dne is acquired directly or indirectly by a related e person. In nthe preamble,,the IRS stated: The final regulations reserve on the treatment of an acquisition of indebtedness in a nonrecognition transaction, such as a merger of the creditor into a subsidiary of the debtor in a reorganization under section 368(a)(1)(A). As stated in the preamble to the proposed regulations, the Treasury department intends to issue regulations clarifying the measurement and treatment of income from discharge of indebtedness in certain nonrecognition transactions in which the debtor acquires its own indebtedness, or the creditor assumes a debtor s obligation to the creditor. In the preamble to the proposed regulations issued on March 22, 1991, 7 the IRS asserted: TAXES THE TAX MAGAZINE 17

The Treasury Department intends to issue regulations designed to prevent the elimination of income from discharge of indebtedness in certain nonrecognition transactions. In general, if assets are transferred in a tax-free transaction and the transferee receives the assets with a carryover (or, in certain cases, a substituted) basis, any built-in income or gain is taxed when the transferee disposes of the asset. If, however, the debtor acquires its own indebtedness, the indebtedness is extinguished. In that case, the indebtedness in all cases should be treated as if it is acquired by the transferee and then satisfied. Similar treatment should apply if a creditor assumes a debtor s obligation to the creditor. In both cases, the debt is effectively extinguished, and current recognition of income from discharge of indebtedness is appropriate. Thus, the regulations to be issued will provide for recognition of income from discharge of indebtedness in these cases. Some of the nonrecognition transactions to which the regulation will apply will include transactions described in sections 332, 351, 368, 721, and 731. The above language age from the preambles advocated ated that a debt extinguishment should be treated as if the acquiring ing corporation fi rst assumed dth the debt owed by the transferor to the acquiring corporation and then satisfied the debt. The question is how the amount of such income, if any, should be determined. Should income or loss be recognized if the FMV of the assumed debt is different from the face amount of the debt due to prevailing market conditions at the time of the nonrecognition transaction? It is now more than 20 years later and the IRS has yet to issue regulations or guidance on this unsettled issue. If the extinguished debt is a capital asset and the acquiring corporation is required to recognize income to the extent that the FMV is less than the face amount of the extinguished debt, it could be faced with the unpleasant result of ordinary COD income as the successor debtor and a capital loss as the creditor on the extinguished debt. 8 Example 1 Facts. On January 1, year 1, B, a wholly owned subsidiary of P, borrowed $100 from C, also a wholly owned subsidiary of P, in exchange for B s note providing for $10 of annual interest at the end of each year, and repayment of $100 at the end of year 5. P and its subsidiaries file their income tax returns on a separate company basis. The note is a capital asset in the hands of C. As of January 1, year 3, B fully performed its obligation, but the note s FMV was $90 due to an increase in prevailing market interest rates. On January 1, year 3, B merged into C in a nontaxable acquisitive reorganization under Code Sec. 368(a)(1)(D). Analysis. B, as the debtor, should have no gain or loss under Code Sec. 357(a) since the note is treated as assumed by C in the reorganization. C, as the creditor, should have no gain or loss if the determination is based on the premise that the FMV of the debt is irrelevant and only the adjusted issue price of the debt ($100) and the basis in the debt ($100) are considered. If the FMV of the extinguished debt is relevant, C would have COD income of $10 as the successor debtor (upon assuming the debt) that has discharged a $100 debt for $90 under Code Sec. 61(a)(12), and a capital loss of $10 as the creditor on the extinguishment of a $100 debt for $90 under Code Sec. 1271(a)(1). Transfers to Controlled Corporations Under Code Sec. 351(a), no gain or loss is recognized if property p is transferred rre to a corporation ra controlled by ythe transferors rs in exchange for stock (other than nonqualified preferred stock described in Code Sec. 351(g)) of the controlled corporation. Code Sec. 357(a) provides that the assumption of liabilities would not trigger gain or income, unless either Code Sec. 357(b) or (c) applies. Unless stated otherwise, neither Code Sec. 357(b) nor (c) applies for purposes of the following discussion. Example 2. On January 1, year 1, B borrowed $100 from C, its wholly owned subsidiary, in exchange for B s note with adequately stated interest. B and C are each in a separate active trade or business and file income tax returns on a separate company basis. The note is a capital asset in the hands of C. Other than the stock in C, B does not own stock in any other corporation. On January 1, year 3, B transferred all of its assets 18 2013 CCH. All Rights Reserved.

April 2013 and liabilities, including B s note to C, pursuant to a Code Sec. 351 transfer. The FMV and basis of B s assets are greater than the liabilities transferred to C. Due to an increase in prevailing market interest rates, the note s FMV was $90 at the time of the transfer. As described above, we explore three potential income tax consequences: (1) the debtor s gain/loss on debt transfer, (2) the creditor s gain/loss on debt transfer, and (3) COD income or deduction. Based on Kniffen, B should not have gain or loss on the transfer of the debt owed to C under Code Sec. 357(a). Since C did not acquire B s note at a discount or a premium or claim a partial bad debt deduction, the face amount of the debt should equal its basis in the debt. Hence, C should also have no creditor s gain or loss on the debt transfer. B should have no COD income since the debt was not extinguished until C assumed the note. Code Sec. 357(a) also should apply to prevent income recognition. However, it is unsettled as to whether C would have COD income, as the successor debtor, and a capital loss, as the creditor, from the debt extinguishment. In the absence of regulations or other clear guidance, C should not be required ed to recognize COD income with a corresponding resp capital loss. If the debt is an ordinary income asset, set, such as a trade receivable, in the hands of C, the corresponding ng loss would be an ordinary loss. 9 Code Sec. 61 defines gross income as all income from whatever source derived. This generally means income recognition, ion, unless s specifically excluded for income tax xpurposes, po on any economic gains (i.e., accessions to wealth) inured to a taxpayer. 10 The extinguishment of debt does not seem to generate any economic gains or accessions to wealth to C. Example 2 specifies that B did not transfer stock of another corporation to C as part of the Code Sec. 351 transfer. If stock of another corporation were transferred to C, B could recognize income from the transfer of its liabilities, including B s note, to C as a result of Code Sec. 304. While a detailed analysis of Code Sec. 304 is beyond the scope of this column, the basics will be discussed here. Code Sec. 304(b)(3)(A) states that Code Sec. 304(a), rather than Code Sec. 351 and related Code Secs. 357 and 358, applies to any property received in a transaction described in Code Sec. 304(a). In effect, a transfer of stock of one corporation to another corporation in exchange for stock of the acquiring corporation may still qualify under Code Sec. 351. However, any liability transferred to and assumed by the acquiring corporation would be tested under Code Sec. 304(a). Since Code Sec. 357(a) does not apply to the assumption of liabilities with respect to a transaction described in Code Sec. 304(a), B can have income due to the liability assumption. Subsidiary Liquidation Code Sec. 332 provides that a liquidation is not taxable to a corporate shareholder if the corporate shareholder owns at least 80 percent (by vote and value as determined by Code Sec. 1504(a)(2)) of the stock of the liquidating subsidiary. Code Sec. 337 provides that the liquidating subsidiary does not recognize gain or loss from the liquidation. Because of Code Sec. 337(b), the liquidating subsidiary also does not recognize any gain or loss on any transfer of property in repayment of debts owed to the parent corporation. The parent corporation, however, may recognize gain or loss from the repayment of such debts at the time of liquidation. Under Reg. 1.332-7, the parent corporation is required to recognize any gain or loss to the extent of the difference between the amount received in payment of the debt and the tax basis of the debt. Although gain may be recognized on the debt repayment, the parent corporation is required to use carryover basis on all assets received through liquidation without adjustment for any gain or loss recognized on the debt repayment. ent In the preamble to the 1991 proposed regulations under Code Sec. 108(e)(4), the IRS stated the following regarding Reg. 1.332-7: It is anticipated that a conforming amendment will be made to 1.332-7 to characterize the income recognized by a parent corporation that purchased its subsidiary s bonds at a discount as income from discharge of indebtedness income recognized by the surviving entity (rather than as gain recognized by the parent). This comment was directed at the following example presented in Reg. 1.332-7: For example, if the parent corporation purchased its subsidiary s bonds at a discount and upon TAXES THE TAX MAGAZINE 19

liquidation of the subsidiary the parent corporation receives payment for the face amount of such bonds, gain shall be recognized to the parent corporation. Reg. 1.332-7 was issued in 1955, long before the enactment of Code Sec. 108(e)(4) in 1980. 11 Under this section, a debtor is treated as acquiring its own debt when the debt is acquired by a related person from an unrelated person. This deemed acquisition by the debtor may result in COD income at the time the debt is acquired. Related persons are defined in Code Secs. 267(b) and 707(b)(1). A detailed discussion of Code Sec. 108(e)(4) is beyond the scope of this column, but, suffice it to say, if a parent corporation acquires a debt of its wholly owned subsidiary from an unrelated person at a discount, the debtor subsidiary will recognize COD income equal to the excess of the adjusted issue price over the basis of the debt in the hands of the parent corporation. The debtor subsidiary is treated as issuing a new debt to its parent corporation for an issue price equal to the amount paid by the parent corporation (i.e., the adjusted basis in the hands of the parent). Just as no regulations have been issued related to the other assertions made in the preambles discussed sed above, no conforming amendment has been en made to Reg. 1.332-7. In LTR 200404058, 12 the IRS applied plied Reg. 1.332-7 without t modification and dh held that t [a]ny gain or loss realized by Coop Parent on satisfaction of the Coop Subsidiary Indebtedness shall be recognized. ed. Based on the facts presented in the private eruin ruling, Code Sec. 108(e)(4) was not applicable because Coop Parent did not acquire the Coop Subsidiary Indebtedness from an unrelated person. It is not clear if the IRS has abandoned its efforts to issue new regulations as stated in the preambles above but, in effect, Reg. 1.332-7 is still valid unless the extinguished debt falls within the reach of Code Sec. 108(e)(4). Example 3. On January 1, year 1, S borrowed $100 from P, its parent corporation, in exchange for S s note with adequately stated interest. P and S are each in a separate active trade or business and file income tax returns on a separate company basis. The note is a capital asset in the hands of P. On January 1, year 3, S liquidated under Code Sec. 332 and distributed all of its assets and liabilities, including its note to P. Due to an increase in prevailing market interest rates, the note s FMV was $90 at the time of liquidation. Based on Code Sec. 337(b), S should not have gain or loss on the transfer of the debt owed to P. Since P did not acquire S s note at a discount or a premium or claim a partial bad debt deduction, the adjusted issue price (which should equal the face amount of the debt) should equal its basis in the debt. Hence, P should have no creditor s gain or loss on the debt transfer. S should have no COD income pursuant to Code Sec. 337(b). It is unsettled whether P should have COD income, as the successor debtor, and a capital loss, as the creditor, from the debt extinguishment as a result of the decline in the FMV of S s note at the time of liquidation. In the absence of regulations or other clear guidance, P should not be required to recognize COD income of $10 and a corresponding capital loss of $10 on the debt extinguishment. However, the above discussion only applies to the extent that Code Sec. 332 applies to the liquidation of the subsidiary. In general, Code Sec. 332 only applies when the parent receives payment for the subsidiary stock in the liquidation. When the subsidiary is insolvent, no payment can be received in exchange for the subsidiary stock because all assets would be allocable to the subsidiary s debts. As a result, Code Sec. 332 does not apply to the transaction a tion and P may have an ordinary bad debt deduction, rather than a capital loss, from the debt extinguishment. In Rev. Rul. 2003-125, 13 the IRS stated that a bad debt deduction under Code Sec. 166 may be claimed by the creditor parent corporation in the liquidation of an insolvent subsidiary. Similarly, the subsidiary would have COD income which would most likely be excluded from income under the insolvency provisions of Code Sec. 108(a)(1)(B). Acquisitive Reorganizations Under Code Sec. 368(a)(1), there are three basic types of acquisitive asset reorganization provisions involving solvent corporations: (1) Code Sec. 368(a)(1)(A) statutory merger, (2) Code Sec. 368(a)(1)(C) reorganization, and (3) Code Sec. 368(a)(1)(D) acquisitive reorganization. Following is a brief overview of these types of reorganizations. 20 2013 CCH. All Rights Reserved.

April 2013 general nontaxable liability assumption rule under Code Sec. 357(a), however, is modified by Code Sec. 357(b) and (c). Code Sec. 357(b) provides that Sec. 357(a) does not apply if there is no bona fide business purpose for the assumption or the principal purpose of such assumption is to avoid fed- A Code Sec. 368(a)(1)(A) statutory merger is a transaction effected pursuant to statute(s) where, as a result of the operation of such statute(s), the assets and liabilities of the transferor corporation and its disregarded entities become the assets and liabilities of the transferee corporation and its disregarded entities. A Code Sec. 368(a)(1)(C) reorganization is an acquisition by one corporation, in exchange for its voting stock (or the voting stock of its parent corporation), of substantially all of the assets of another corporation. If no boot is involved, then the assumption of liabilities of the acquired corporation is disregarded. If boot is provided, then the acquisition is nontaxable only if the total amount of boot (including liabilities assumed by the acquiring corporation) is not more than 20 percent of the FMV of all of the assets of the acquired corporation. 14 An acquisitive Code Sec. 368(a)(1)(D) reorganization is a transfer by one corporation (transferor) of all or part of its assets to another corporation (acquirer) if immediately after the transfer, the transferor and/or one or more of its shareholders is in control of the acquirer. In this context, control means at least 50 percent of the vote or value of the acquirer s stock determined under Code Sec. 318, with certain modifications. 15 As part of the plan, stock or securities of the acquirer are distributed by the transferor to its shareholders hold s under Code Sec. 354. Pursuant to Code Sec. 354, the acquirer must acquire substantially all of the assets of the transferor. The same rules on debt extinguishment ish ent should apply to each of these reorganizations. ion Code Sec. 357(a) should apply to these types of nontaxable reorganizations and therefore the assumption of liabilities by the acquiring corporation should not result in gain recognition to the acquired corporation. Furthermore, Code Sec. 357(c) is not applicable to these reorganizations and, therefore, the acquired corporation does not recognize gain even if the assumed liabilities exceed the aggregate tax basis of transferred assets. Similarly, Rev. Rul. 72-464, 16 which addressed a Code Sec. 368(a)(1)(A) statutory merger, should apply to the other two types of acquisitive reorganizations when the adjusted issue price (typically the face amount) does not equal to the adjusted basis of the extinguished debt in the hands of the acquiring corporation. Example 4. P is the parent corporation of B and C, two wholly owned subsidiaries. Each corporation files returns on a separate company basis. On January 1, year 1, B borrowed $100 from C in exchange for B s note with adequately stated interest. The note is a capital asset in the hands of C. On January 1, year 3, B transferred all of its assets and liabilities, including B s note to C, pursuant to a nontaxable Code Sec. 368(a)(1)(D) reorganization. Due to an increase in prevailing market interest rates, the note s FMV was $90 at the time of the reorganization. B should have no COD income under Code Sec. 357(a). C also should not have creditor s gain or loss on the debt transfer since it did not acquire the note at a discount or a premium or claim a partial bad debt deduction. Finally, in the absence of regulations or other clear guidance, C should not be required to recognize $10 of COD income as a successor debtor and a corresponding $10 of capital loss as the creditor as a result of a decline in the FMV of B s note at the time of the reorganization. c. Conclusion ENDNOTES Although it is common that debts are extinguished in a nontaxable corporate transaction, the income tax consequences on such debt extinguishment are unsettled. This column explores the potential income tax consequences of Debtor-to-Creditor Transfers. The next column will tackle Creditor-to-Debtor Transfers and the consolidated return rules on the extinguishment of intercompany obligations. * This article represents the views of the authors only, and does not necessarily represent the views or professional advice of Plante Moran. 1 A.L. Kniffen, 39 TC 553, Dec. 25,807 (1962). 2 Edwards Motor Transit Co., 23 TCM 1968, Dec. 27,075(M), TC Memo. 1964-317. 3 Code Sec. 357(a) provides that in a Code Sec. 351 transfer or a nontaxable reorganization, if liabilities of the transferor or acquired corporation are assumed by the acquiring corporation, such assumption shall not be treated as money or property received by the transferor or acquired corporation. This TAXES THE TAX MAGAZINE 21

eral income tax. Code Sec. 357(c) provides that in a Code Sec. 351 transfer, the transferor is required to recognize gain to the extent that the liabilities assumed by the acquiring corporation exceed the aggregate tax basis of assets transferred. 4 GCM 34902 (June 8, 1972), provided the analysis relating to the issuance of Rev. Rul. 72-464, 1972-2 CB 214. 5 Rev. Rul. 72-464, 1972-2 CB 214. 6 T.D. 8460, 1993-1 CB 19. 7 56 FR 12135. 8 House Ways and Means Committee Chairman Dave Camp, on January 24, 2013, released a proposal to reform the tax treatment of various financial transactions. Included in this proposal is a proposal to eliminate phantom income on debt restructurings when debt is modified or exchanged and the issue price of the new debt is less than the issue price of the debt prior to the modification because the debt instrument has lost value since the loan was originally made. This phantom income arises even when no principal is actually forgiven in the modification. While not identical, this is similar to the issues outlined above. However, the proposal as written would only apply to specified debt modifications which does not appear to include a transaction where the debt is extinguished through any of the transactions discussed in this column. 9 An ordinary income asset is any asset that is not a capital asset or a Code Sec. 1231 asset. See Code Sec. 1221 and Code Sec. 1231 for the definition of these assets. 10 See Glenshaw Glass Co., SCt, 55-1 USTC 9308, 348 US 426 (1955). 11 The Bankruptcy Tax Act of 1980 (P.L. 96-589). 12 LTR 200404058 (Jan. 23, 2004). 13 Rev. Rul. 2003-125, 2003-2 CB 1243. 14 Code Sec. 368(a)(2)(B). 15 Code Secs. 304(c) and 368(a)(2)(H)(i). 16 Supra note 5. This article is reprinted with the publisher s permission from the TAXES THE TAX MAGAZINE, a month ly journal published by CCH, a Wolters Kluwer business. Copying or dis tri bu tion without the pub lish er s per mis sion is prohibited. To subscribe to the TAXES THE TAX MAGAZINE or other CCH Journals please call 800-449-8114 or visit www.cchgroup.com. All views expressed in the articles and col umns are those of the author and not necessarily those of CCH. 22 2013 CCH. All Rights Reserved.