The IRS issued proposed regulations providing guidance in applying the bankruptcy and insolvency exceptions for cancellation of debt (“COD”) income to grantor trusts and disregarded entities. While COD income is generally included in a taxpayer’s gross income, if the discharge of debt occurs in a Title 11 case (the “bankruptcy exception”) or to the extent the taxpayer is insolvent when the discharge occurs (the “insolvency exception”), such income is excluded from gross income.17 The COD income provisions of the Code use the term “taxpayer,” which is generally defined as any person subject to any internal revenue tax.18 The question, therefore, is how the insolvency and bankruptcy exceptions apply with respect to COD income resulting from the discharge of debt owed by a grantor trust or disregarded entity since such entities are not treated as “taxpayers” for purposes of the Code. The proposed regulations provide that, for purposes of applying the insolvency and bankruptcy exceptions to COD income of a grantor trust or a disregarded entity, the term “taxpayer” refers to the direct or indirect owner(s) of the grantor trust or disregarded entity.19 As a result, under the proposed regulations, if a grantor trust or disregarded entity is under the jurisdiction of a bankruptcy court or is insolvent while its owner is not, the bankruptcy and insolvency exceptions would not be available. The proposed regulations would apply to COD income occurring on or after the date final regulations are published in the Federal Register.