
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC1017]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
          Subchapter O--Gain or Loss on Disposition of Property
 
               PART II--BASIS RULES OF GENERAL APPLICATION
 
Sec. 1017. Discharge of indebtedness


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


                               Amendments

    1999--Subsec. (b)(3)(E)(i). Pub. L. 106-170 substituted 
``1221(a)(1)'' for ``1221(1)''.
    1998--Subsec. (a)(2). Pub. L. 105-206 substituted ``(b)(2)(E)'' for 
``(b)(2)(D)''.
    1996--Subsec. (b)(4)(A). Pub. L. 104-188 substituted ``subsection 
(b)(2)(E)'' for ``subsection (b)(2)(D)''.
    1993--Subsec. (a)(2). Pub. L. 103-66, Sec. 13150(c)(6), substituted 
``, (b)(5), or (c)(1)'' for ``or (b)(5)''.
    Subsec. (b)(3)(A). Pub. L. 103-66, Sec. 13150(c)(7), inserted ``or 
(c)(1)'' after ``subsection (b)(5)''.
    Subsec. (b)(3)(F). Pub. L. 103-66, Sec. 13150(c)(8), added subpar. 
(F).
    1990--Subsec. (b)(4)(C). Pub. L. 101-508 substituted 
``subparagraphs'' for ``subparagraph''.
    1988--Subsec. (b)(4). Pub. L. 100-647 substituted ``Special rules 
for'' for ``Ordering rule in the case of'' in heading, and amended text 
generally. Prior to amendment, text read as follows: ``Any amount which 
is excluded from gross income under section 108(a) by reason of the 
discharge of qualified farm indebtedness (within the meaning of section 
108(g)(2)) and which under subsection (b) of section 108 is to be 
applied to reduce basis shall be applied--
        ``(A) first to reduce the tax attributes described in section 
    108(b)(2) (other than subparagraph (D) thereof),
        ``(B) then to reduce basis of property other than property 
    described in subparagraph (C), and
        ``(C) then to reduce the basis of land used or held for use in 
    the trade or business of farming.''
    1986--Subsec. (a)(2). Pub. L. 99-514, Sec. 822(b)(4), substituted 
``or (b)(5)'' for ``, (b)(5), or (c)(1)(A)''.
    Subsec. (b)(3)(A). Pub. L. 99-514, Sec. 822(b)(5), struck out ``or 
(c)(1)(A)'' after ``subsection (b)(5)''.
    Subsec. (b)(4). Pub. L. 99-514, Sec. 405(b), added par. (4).
    1980--Pub. L. 96-589 generally revised and expanded the section to 
specify the amount of reduction of basis of property under different 
subsections of section 108 of this title and the property to which such 
reduction is applicable, and provided for recapture of reductions for 
purposes of gains from depreciable property.
    1976--Pub. L. 94-455, Secs. 1906(b)(13)(A), 1951(c)(1), substituted 
``section 108'' for ``section 108(a)'' in three places and struck out 
``or his delegate'' after ``Secretary''.


                    Effective Date of 1999 Amendment

    Amendment by Pub. L. 106-170 applicable to any instrument held, 
acquired, or entered into, any transaction entered into, and supplies 
held or acquired on or after Dec. 17, 1999, see section 532(d) of Pub. 
L. 106-170, set out as a note under section 170 of this title.


                    Effective Date of 1996 Amendment

    Amendment by Pub. L. 104-188 effective as if included in the 
provision of the Revenue Reconciliation Act of 1993, Pub. L. 103-66, 
Secs. 13001-13444, to which such amendment relates, see section 1703(o) 
of Pub. L. 104-188, set out as a note under section 39 of this title.


                    Effective Date of 1993 Amendment

    Amendment by Pub. L. 103-66 applicable to discharges after Dec. 31, 
1992, in taxable years ending after such date, see section 13150(d) of 
Pub. L. 103-66, set out as a note under section 108 of this title.


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provision of the Tax Reform Act of 1986, 
Pub. L. 99-514, to which such amendment relates, see section 1019(a) of 
Pub. L. 100-647, set out as a note under section 1 of this title.


                    Effective Date of 1986 Amendment

    Amendment by section 405(b) of Pub. L. 99-514 applicable to 
discharges of indebtedness occurring after Apr. 9, 1986, in taxable 
years ending after such date, see section 405(c) of Pub. L. 99-514, set 
out as a note under section 108 of this title.
    Amendment by section 822(b)(4), (5) of Pub. L. 99-514 applicable to 
discharges after Dec. 31, 1986, see section 822(c) of Pub. L. 99-514, 
set out as a note under section 108 of this title.


                    Effective Date of 1980 Amendment

    Amendment by Pub. L. 96-589 applicable to transactions which occur 
after Dec. 31, 1980, other than transactions which occur in a proceeding 
in a bankruptcy case or similar judicial proceeding or in a proceeding 
under Title 11 commencing on or after Dec. 31, 1980, with an exception 
permitting the debtor to make the amendment applicable to transactions 
occurring after Sept. 30, 1979 in a specified manner, see section 7(a) 
and (f) of Pub. L. 96-589, set out as a note under section 108 of this 
title.

                  Section Referred to in Other Sections

    This section is referred to in sections 108, 312, 1033 of this 
title.
