Today, Treasury and the IRS issued final regulations (TD 9771) under section 108 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.  These regulations apply to discharge of indebtedness income occurring on or after June 10.

According to the preamble, the purpose and scope of these regulations is primarily limited to defining the term “taxpayer” for purposes of applying the bankruptcy and the insolvency exclusions from gross income of discharge of indebtedness income of a grantor trust or disregarded entity.  The final regulations provide that, for purposes of applying sections 108(a)(1)(A) and (B) to discharge of indebtedness income of a grantor trust or a disregarded entity, the term “taxpayer,” as used in sections 108(a)(1) and (d)(1) through (3), refers to the owner of the grantor trust or the disregarded entity.  The regulations also provide that, if a partnership holds an interest in a grantor trust or disregarded entity, the applicability of sections 108(a)(1)(A) and (B) to the discharge of indebtedness income is tested by looking to each partner to whom the income is allocable.