On February 17,2009, the American Recovery and Reinvestment Act of 2009 (the “Act”) was enacted. The Act is an approximately $787 billion stimulus package that is aimed at addressing the current economic challenges prevalent in the United States. The Act contains several business tax reduction provisions. The Act permits some taxpayers the ability to elect to defer cancellation-of-debt income when a taxpayer or a related party repurchases debt issued by the taxpayer.
Generally, under Section 108 of the Internal Revenue Code income resulting from the cancellation of indebtedness is realized at the time the debt is satisfied for less than its principal amount. The Act amended Section 108 by providing for a deferral and inclusion of income arising from indebtedness discharged by the reacquisition of a debt instrument. The Act provides in pertinent part “ At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument shall be includible in gross income ratably over the 5-taxable-year period beginning with (A) in the case of a reacquisition occurring in 2009, the fifth taxable year following the taxable year in which the reacquisition occurs, and (B) in the case of a reacquisition occurring in 2010, the fourth taxable year following the taxable year in which the reacquisition occurs.”
This amendment will make it easier for borrowers to restructure debt by deferring tax payments for either 5 or 4 years and then spreading out the tax payments related to cancellation of debt over the next 5 years.