Sec. 108(i): Considerations for Electing Consolidated Groups

By Sarah Hoyt, J.D., LL.M., Washington

Editor: Annette B. Smith, CPA

Enacted in 2009, the American Recovery and Reinvestment Act, P.L. 111-5, added Sec. 108(i) to the Internal Revenue Code. Sec. 108(i) generally provides relief to corporate and certain other business taxpayers by giving them an option to irrevocably elect to defer recognition of cancellation-of-debt (COD) income resulting from a reacquisition of applicable debt instruments in tax years 2009 and 2010.

This COD income is includible in gross income ratably over a five-tax-year inclusion period beginning with the fifth tax year following the tax year of the reacquisition (if it occurred in 2009) or with the fourth tax year of the reacquisition (if it occurred in 2010). Therefore, electing taxpayers generally began including their respective deferred income on 2014 tax returns. However, Sec. 108(i)(5)(D)(i) provides for immediate recognition of the entire amount upon the occurrence of certain mandatory acceleration events, includingcertain changes in tax status and cessation of corporation existence. The following example illustrates the timing of a Sec. 108(i) election in a consolidated group.

Example 1: In 2009, P (the common parent) owns all the stock of S1 (member of the group), and S1 reacquires its own indebtedness and realizes $500 of COD income. Pursuant to an election under Sec. 108(i), S1 will defer its income for the following five years (2009-2013) and then ratably include its income for five years (2014-2018), as shown in the exhibit below.

Exhibit: Timeline for Sec. 108(i) election


As long as S1 does not undergo a mandatory acceleration event, it should take S1 (and the P Group) approximately 10 years to include the entire $500 of deferred COD income.

Corporate and Consolidated Group Treatment

In the context of consolidated groups, the common parent makes the Sec. 108(i) election on behalf of all members of the group (Rev. Proc. 2009-37). The regulations under Sec. 108(i) provide special rules for consolidated groups; for example, an electing member (other than the common parent) of a consolidated group may elect at any time to accelerate the inclusion of its remaining deferred COD income with respect to all applicable debt instruments. In addition, the determination of whether the member has engaged in an "impairment transaction" (i.e., a transaction that impairs an electing corporation's ability to pay the amount of federal income tax on its deferred COD income) is made on a groupwide basis.

Consolidated groups (and separate corporations) that undertake certain restructuring transactions may trigger a mandatory acceleration event. Notably, Regs. Sec. 1.108(i)-1(b)(2)(ii)(B) provides an exception for Sec. 381(a) transactions under which the acquiring corporation succeeds to the electing corporation's remaining deferred COD income.

Example 2: The facts are the same as in Example 1, except that in 2010 P sells all the stock of S1 to X, an unrelated corporation, and P and X make a timely Sec. 338(h)(10) election with respect to the sale. A question arises as to whether S1 (and the P Group) must recognize S1's deferred COD income at that time. Pursuant to the regulations under Sec. 108(i) and by operation of Sec. 338(h)(10), prior to departing the P Group, S1 is deemed to distribute all its assets to P in a Sec. 381 transaction. Therefore, S1 ceases its corporate existence—normally a mandatory acceleration event. However, S1 is not required to take into account its remaining deferred COD income because its assets are acquired in a transaction to which Sec. 381(a) applies. As a result, P succeeds to S1's remaining deferred COD income and to S1's reporting requirements as if P were the electing corporation, so there is no recognition of COD income until 2014. The same result would occur if S1 merely merged with and into P in a Sec. 368(a)(1)(A) reorganization.

Recent Developments

Taxpayers may ask whether the IRS can adjust the amount of COD income deferred by a Sec. 108(i) election even if the tax return of the initial election year is closed pursuant to the statute of limitation (i.e.,Sec. 6501 generally limits the assessment period to three years). In January 2016, the IRS addressed this question in Chief Counsel Advice 201604017, concluding that it may adjust the amount of COD income deferred by a Sec. 108(i) election even though the initial year of the election is closed pursuant to the statute of limitation. Citing Disston, 325 U.S. 442 (1945), and ABKCO Industries Inc., 56 T.C. 1083 (1971), the IRS concluded that it can recompute a taxpayer's income for a closed year when determining a deficiency for an open year.

Therefore, taxpayers should confirm that the amount reported in the election year was correct and should be aware that the IRS may adjust a misstatement or error, resulting in additional income to the taxpayer in a later year.


By 2016, all taxpayers that made a proper Sec. 108(i) election in 2009 or 2010 (and did not undergo a mandatory acceleration event) generally should be recognizing the second ratable portion of deferred COD income on their 2015 tax returns.

Other factors that taxpayers should consider are whether they have complied with the relevant state and local laws. For example, at the time of the election, what were the state law consequences? Did the applicable state tax law conform to the Internal Revenue Code in 2009 and 2010? For example, Georgia has not adopted deferral of COD income resulting from a Sec. 108(i) election. Thus, a Georgia taxpayer that made a Sec. 108(i) election should have deferred the income for federal purposes but recognized it for state tax purposes.

Now that all electing taxpayers should have begun recognizing their respective deferred COD income, it will become clear whether Sec. 108(i) achieved its intended purpose of assisting businesses by allowing a four- or five-year deferral of COD income.


Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington.

For additional information about these items, contact Ms. Smith at 202-414-1048 or

Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.

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