S.Amdt. 441

SA 441. Mr. REID (for himself, Mr. Ensign, and Mr. Conrad) submitted
an amendment intended to be proposed to amendment SA 98 proposed by Mr.
Inouye (for himself and Mr. Baucus) to the bill H.R. 1, making
supplemental appropriations for job preservation and creation,
infrastructure investment, energy efficiency and science, assistance to
the unemployed, and State and local fiscal stabilization, for fiscal
year ending September 30, 2009, and for other purposes; which was
ordered to lie on the table; as follows:

On page 487, beginning with line 1, strike all through page
488, line 22, and insert the following:

PART IV--RULES RELATING TO DEBT INSTRUMENTS

SEC. 1231. DEFERRAL AND RATABLE INCLUSION OF INCOME ARISING
FROM INDEBTEDNESS DISCHARGED BY THE
REACQUISITION OF A DEBT INSTRUMENT.

(a) In General.--Section 108 (relating to income from
discharge of indebtedness) is amended by adding at the end
the following new subsection:
``(i) Deferral and Ratable Inclusion of Income Arising From
Indebtedness Discharged by the Reacquisition of a Debt
Instrument.--
``(1) In general.--At the election of the taxpayer, income
from the discharge of indebtedness in connection with the
reacquisition of a debt instrument after December 31, 2008,
and before January 1, 2011, 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.
``(2) Deferral of deduction for original issue discount in
debt for debt exchanges.--
``(A) In general.--If, as part of a reacquisition to which
paragraph (1) applies, any debt instrument is issued for the
debt instrument being reacquired (or is treated as so issued
under subsection (e)(4) and the regulations thereunder) and
there is any original issue discount determined under subpart
A of part V of subchapter P of this chapter with respect to
the debt instrument so issued--
``(i) except as provided in clause (ii), no deduction
otherwise allowable under this chapter shall be allowed to
the issuer of such debt instrument with respect to the
portion of such original issue discount which--

``(I) accrues before the 1st taxable year in the 5-taxable-
year period in which income from the discharge of
indebtedness attributable to the reacquisition of the debt
instrument is includible under paragraph (1), and
``(II) does not exceed the income from the discharge of
indebtedness with respect to the debt instrument being
reacquired, and

``(ii) the aggregate amount of deductions disallowed under
clause (i) shall be allowed as a deduction ratably over the
5-taxable-year period described in clause (i)(I).
If the amount of the original issue discount accruing before
such 1st taxable year exceeds the income from the discharge
of indebtedness with respect to the debt instrument being
reacquired, the deductions shall be disallowed in the order
in which the original issue discount is accrued.
``(B) Deemed debt for debt exchanges.--For purposes of
subparagraph (A), if any debt instrument is issued by an
issuer and the proceeds of such debt instrument are used
directly or indirectly by the issuer to reacquire a debt
instrument of the issuer, the debt instrument so issued shall
be treated as issued for the debt instrument being
reacquired. If only a portion of the proceeds from a debt
instrument are so used, the rules of subparagraph (A) shall
apply to the portion of any original issue discount on the
newly issued debt instrument which is equal to the portion of
the proceeds from such instrument used to reacquire the
outstanding instrument.
``(3) Debt instrument.--For purposes of this subsection,
the term `debt instrument' means a bond, debenture, note,
certificate, or any other instrument or contractual
arrangement constituting indebtedness (within the meaning of
section 1275(a)(1)).
``(4) Reacquisition.--For purposes of this subsection--
``(A) In general.--The term `reacquisition' means, with
respect to any debt instrument, any acquisition of the debt
instrument by--
``(i) the debtor which issued (or is otherwise the obligor
under) the debt instrument, or
``(ii) any person related to such debtor.

Such term shall also include the complete forgiveness of the
indebtedness by the holder of the debt instrument.
``(B) Acquisition.--The term `acquisition' shall, with
respect to any debt instrument, include an acquisition of the
debt instrument for cash, the exchange of the debt instrument
for another debt instrument (including an exchange resulting
from a modification of the debt instrument), the exchange of
the debt instrument for corporate stock or a partnership
interest, and the contribution of the debt instrument to
capital.
``(5) Other definitions and rules.--For purposes of this
subsection--
``(A) Related person.--The determination of whether a
person is related to another person shall be made in the same
manner as under subsection (e)(4).
``(B) Election.--
``(i) In general.--An issuer of a debt instrument shall
make the election under this subsection with respect to any
debt instrument by clearly identifying such debt instrument
on the issuer's records as an instrument to which the
election applies before the close of the day on which the
reacquisition of the debt instrument occurs (or such other
time as the Secretary may prescribe). Such election, once
made, is irrevocable.
``(ii) Pass through entities.--In the case of a
partnership, S corporation, or other pass through entity, the
election under this subsection shall be made by the
partnership, the S corporation, or other entity involved.
``(C) Coordination with other exclusions.--If a taxpayer
elects to have this subsection apply to a debt instrument,
subparagraphs (A), (B), (C), (D), and (E) of subsection
(a)(1) shall not apply to the income from the discharge of
such indebtedness for the taxable year of the election or any
subsequent taxable year.
``(D) Acceleration of deferred items.--In the case of the
death of the taxpayer, the liquidation or sale of
substantially all the assets of the taxpayer (including in a
title 11 or similar case), the cessation of business by the
taxpayer, or similar circumstances, any item of income or
deduction which is deferred under this subsection (and has
not previously been taken into account) shall be taken into
account in the taxable year in which such event occurs (or in
the case of a title 11 case, the day before the petition is
filed).
``(6) Authority to prescribe regulations.--The Secretary
may prescribe such rules and regulations as may be necessary
or appropriate for purposes of applying this subsection.''.
(b) Effective Date.--The amendments made by this section
shall apply to discharges in taxable years ending after
December 31, 2008.

SEC. 1232. MODIFICATIONS OF RULES FOR ORIGINAL ISSUE DISCOUNT
ON CERTAIN HIGH YIELD OBLIGATIONS.

(a) Suspension of Special Rules.--Section 163(e)(5)
(relating to special rules for original issue discount on
certain high yield obligations) is amended by redesignating
subparagraph (F) as subparagraph (G) and by inserting after
subparagraph (E) the following new subparagraph:
``(F) Suspension of application of paragraph.--
``(i) Temporary suspension.--

``(I) In general.--This paragraph shall not apply to any
applicable high yield discount obligation issued after August
31, 2008, and before January 1, 2010. The preceding sentence
shall not apply to any obligation the interest on which is
interest described in section 871(h)(4) (without regard to
subparagraph (D) thereof) or to any obligation issued to a
related person (within the meaning of section 108(e)(4)).

``(ii) Secretarial authority to suspend application.--The
Secretary may suspend the application of this paragraph with
respect to debt instruments issued after December 31, 2009,
if the Secretary determines that such suspension is
appropriate in light of distressed conditions in the debt
capital markets.''.
(b) Interest Rate Used in Determining High Yield
Obligations.--The last sentence of section 163(i)(1) is
amended--
(1) by inserting ``(i)'' after ``regulation'', and
(2) by inserting ``, or (ii) permit, on a temporary basis,
a rate to be used with respect to any debt instrument which
is higher than the applicable Federal rate if the Secretary
determines that such rate is appropriate in light of
distressed conditions in the debt capital markets'' before
the period at the end.
(c) Effective Date.--
(1) Suspension.--The amendments made by subsection (a)
shall apply to obligations issued after August 30, 2008, in
taxable years ending after such date.
(2) Interest rate authority.--The amendments made by
subsection (b) shall apply to obligations issued after the
date of the enactment of this Act, in taxable years ending
after such date.
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