On January 6, 2009, Sen. John Ensign (R – NV) introduced a bill (the “Bill”) that, among other things, would allow corporations and certain partnerships to repurchase at a discount (including through a related party), or modify, their outstanding debt without recognizing cancellation-of-indebtedness (“COD”) income. The Bill would apply to debt repurchased or modified during 2009 and 2010.

Currently, taxpayers with outstanding debt are often subject to tax on COD income when all or a portion of such debt has been economically cancelled. For example, taxpayers that repurchase their own debt at a discount generally recognize ordinary income in the amount of the discount. Such taxpayers also recognize income if a related party purchases the debt. Similarly, taxpayers that modify their debt generally recognize income to the extent such modification reduces the principal or, in some cases, otherwise improves the terms, of the debt.

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