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§ 1017. Discharge of in­debt­ed­ness

(a) • Gen­er­al rule

(b) • Amount and prop­erties de­ter­mined un­der reg­u­la­tions

(1) • In gen­er­al

(2) • Lim­itation in or in­sol­ven­cy

(3) • Certain reductions may only be made in the ba­sis of depreciable prop­er­ty

(4) • Special rules for qual­i­fied farm in­debt­ed­ness

(c) • Special rules

(d) • Recapture of reductions

(a) Gen­er­al rule. If—

(1) an amount is ex­cluded from gross in­come un­der sub­sec­tion (a) of sec­tion 108 (re­lat­ing to dis­charge of in­debt­ed­ness), and

(2) un­der sub­sec­tion (b)(2)(E), (b)(5), or (c)(1) of sec­tion 108, any por­tion of such amount is to be ap­plied to re­duce ba­sis, then such por­tion shall be ap­plied in re­duc­tion of the ba­sis of any prop­er­ty held by the tax­payer at the be­gin­ning of the tax­able year fol­low­ing the tax­able year in which the dis­charge oc­curs.

(b) Amount and prop­erties de­ter­mined un­der reg­u­la­tions.

(1) In gen­er­al. The amount of re­duc­tion to be ap­plied un­der sub­sec­tion (a) (not in ex­cess of the por­tion re­ferred to in sub­sec­tion (a)), and the par­tic­u­lar prop­erties the bases of which are to be re­duced, shall be de­ter­mined un­der reg­u­la­tions pre­scribed by the Sec­re­tary.

(2) Lim­itation in  or in­sol­ven­cy. In the case of a dis­charge to which sub­par­a­graph (A) or (B) of sec­tion 108(a)(1) ap­plies, the re­duc­tion in ba­sis un­der sub­sec­tion (a) of this sec­tion shall not ex­ceed the ex­cess of— (A) the ag­gre­gate of the bases of the prop­er­ty held by the tax­payer im­me­di­ate­ly af­ter the dis­charge, over (B) the ag­gre­gate of the li­a­bil­i­ties of the tax­payer im­me­di­ate­ly af­ter the dis­charge. The pre­ced­ing sen­tence shall not ap­ply to any re­duc­tion in ba­sis by rea­son of an elec­tion un­der sec­tion 108(b)(5).

(3) Certain reductions may only be made in the ba­sis of depreciable prop­er­ty.

(A) In gen­er­al. Any amount which un­der sub­sec­tion (b)(5) or (c)(1) of sec­tion 108 is to be ap­plied to re­duce ba­sis shall be ap­plied only to re­duce the ba­sis of depreciable prop­er­ty held by the tax­payer.

(B) Depreciable prop­er­ty. For pur­poses of this sec­tion, the term "depreciable prop­er­ty" means any prop­er­ty of a char­ac­ter sub­ject to the al­low­ance for depreciation, but only if a ba­sis re­duc­tion un­der sub­sec­tion (a) will re­duce the amount of depreciation or am­or­ti­za­tion which oth­er­wise would be al­low­able for the pe­ri­od im­me­di­ate­ly fol­low­ing such re­duc­tion.

(C) Special rule for part­ner­ship in­ter­ests. For pur­poses of this sec­tion, any in­ter­est of a part­ner in a part­ner­ship shall be treat­ed as depreciable prop­er­ty to the ex­tent of such part­ner's pro­por­tion­ate in­ter­est in the depreciable prop­er­ty held by such part­ner­ship. The pre­ced­ing sen­tence shall ap­ply only if there is a cor­re­spond­ing re­duc­tion in the part­ner­ship's ba­sis in depreciable prop­er­ty with re­spect to such part­ner.

(D) Special rule in case of af­fil­i­ated group. For pur­poses of this sec­tion, if—

(i) a cor­po­ra­tion holds stock in an­oth­er cor­po­ra­tion (here­in­af­ter in this sub­par­a­graph re­ferred to as the "sub­sid­i­ary"), and

(ii) such cor­po­ra­tions are mem­bers of the same af­fil­i­ated group which file a con­sol­i­dated re­turn un­der sec­tion 1501 for the tax­able year in which the dis­charge oc­curs,

then such stock shall be treat­ed as depreciable prop­er­ty to the ex­tent that such sub­sid­i­ary con­sents to a cor­re­spond­ing re­duc­tion in the ba­sis of its depreciable prop­er­ty.

(E) Election to treat cer­tain in­ven­to­ry as depreciable prop­er­ty.

(i) In gen­er­al. At the elec­tion of the tax­payer, for pur­poses of this sec­tion, the term "depreciable prop­er­ty" in­cludes any real prop­er­ty which is de­scribed in sec­tion 1221(a)(1).

(ii) Election. An elec­tion un­der clause (i) shall be made on the tax­payer's re­turn for the tax­able year in which the dis­charge oc­curs or at such oth­er time as may be per­mit­ted in reg­u­la­tions pre­scribed by the Sec­re­tary. Such an elec­tion, once made, may be re­voked only with the con­sent of the Sec­re­tary.

(F) Special rules for qual­i­fied real prop­er­ty busi­ness in­debt­ed­ness. In the case of any amount which un­der sec­tion 108(c)(1) is to be ap­plied to re­duce ba­sis—

(i) depreciable prop­er­ty shall only in­clude depreciable real prop­er­ty for pur­poses of sub­par­a­graphs (A) and (C),

(ii) sub­par­a­graph (E) shall not ap­ply, and

(iii) in the case of prop­er­ty tak­en into ac­count un­der sec­tion 108(c)(2)(B), the re­duc­tion with re­spect to such prop­er­ty shall be made as of the time im­me­di­ate­ly be­fore dis­po­si­tion if ear­li­er than the time un­der sub­sec­tion (a).

(4) Special rules for qual­i­fied farm in­debt­ed­ness.

(A) In gen­er­al. Any amount which un­der sub­sec­tion (b)(2)(E) of sec­tion 108 is to be ap­plied to re­duce ba­sis and which is at­trib­ut­able to an amount ex­cluded un­der sub­sec­tion (a)(1)(C) of sec­tion 108—

(i) shall be ap­plied only to re­duce the ba­sis of qual­i­fied prop­er­ty held by the tax­payer, and

(ii) shall be ap­plied to re­duce the ba­sis of qual­i­fied prop­er­ty in the fol­low­ing or­der:

(I) First the ba­sis of qual­i­fied prop­er­ty which is depreciable prop­er­ty.

(II) Second the ba­sis of qual­i­fied prop­er­ty which is land used or held for use in the trade or busi­ness of farm­ing.

(III) Then the ba­sis of oth­er qual­i­fied prop­er­ty.

(B) Qualified prop­er­ty. For pur­poses of this par­a­graph, the term "qual­i­fied prop­er­ty" has the mean­ing giv­en to such term by sec­tion 108(g)(3)(C).

(C) Certain rules made ap­pli­ca­ble. Rules sim­i­lar to the rules of sub­par­a­graphs (C), (D), and (E) of par­a­graph (3) shall ap­ply for pur­poses of this par­a­graph and sec­tion 108(g).

(c) Special rules.

(1) Reduction not to be made in ex­empt prop­er­ty. In the case of an amount ex­cluded from gross in­come un­der sec­tion 108(a)(1)(A), no re­duc­tion in ba­sis shall be made un­der this sec­tion in the ba­sis of prop­er­ty which the debt­or treats as ex­empt prop­er­ty un­der sec­tion 522 of ti­tle 11 of the Unit­ed States Code.

(2) Reductions in ba­sis not treat­ed as dis­po­si­tions. For pur­poses of this ti­tle, a re­duc­tion in ba­sis un­der this sec­tion shall not be treat­ed as a dis­po­si­tion.

(d) Recapture of reductions.

(1) In gen­er­al. For pur­poses of sec­tions 1245 and 1250—

(A) any prop­er­ty the ba­sis of which is re­duced un­der this sec­tion and which is nei­ther sec­tion 1245 prop­er­ty nor sec­tion 1250 prop­er­ty shall be treat­ed as sec­tion 1245 prop­er­ty, and

(B) any re­duc­tion un­der this sec­tion shall be treat­ed as a de­duc­tion al­lowed for depreciation.

(2) Special rule for sec­tion 1250. For pur­poses of sec­tion 1250(b), the de­ter­mi­na­tion of what would have been the depreciation ad­just­ments un­der the straight line meth­od shall be made as if there had been no re­duc­tion un­der this sec­tion.

(Aug. 16, 1954, ch. 736, 68A Stat. 301; Pub. L. 94-455, ti­tle XIX, § 1906(b)(13)(A), 1951(c)(1), Oct. 4, 1976, 90 Stat. 1834, 1840; Pub. L. 96-589, § 2(b), Dec. 24, 1980, 94 Stat. 3394; Pub. L. 99-514, ti­tle IV, § 405(b), ti­tle VIII, § 822(b)(4), (5), Oct. 22, 1986, 100 Stat. 2224, 2373; Pub. L. 100-647, ti­tle I, § 1004(a)(5), Nov. 10, 1988, 102 Stat. 3386; Pub. L. 101-508, ti­tle XI, § 11704(a)(12), Nov. 5, 1990, 104 Stat. 1388-518; Pub. L. 103-66, ti­tle XIII, § 13150(c)(6)-(8), Aug. 10, 1993, 107 Stat. 448; Pub. L. 104-188, ti­tle I, § 1703(n)(5), Aug. 20, 1996, 110 Stat. 1877; Pub. L. 105-206, ti­tle VI, § 6023(11), July 22, 1998, 112 Stat. 825; Pub. L. 106-170, ti­tle V, § 532(c)(2)(S), Dec. 17, 1999, 113 Stat. 1931.)

HISTORICAL AND REVISION NOTES (26 U.S.C. §1017)

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Page Last Updated:  April 28, 2013