[Federal Register Volume 62, Number 4 (Tuesday, January 7, 1997)]
[Proposed Rules]
[Pages 955-960]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-154]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-208172-91]
RIN 1545-AU71


Basis Reduction Due to Discharge of Indebtedness

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that provide 
ordering rules for the reduction of bases of property under sections 
108 and 1017 of the Internal Revenue Code of 1986. The regulations will 
affect taxpayers that exclude discharge of indebtedness from gross 
income under section 108.

DATES: Written comments must be received by April 7, 1997. Outlines of 
oral comments to be presented at the public hearing scheduled for April 
24, 1997, at 10 a.m. must be received by April 3, 1997.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-208172-91), room 
5228, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. In the alternative, submissions may be hand 
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R 
(REG-208172-91), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC. Alternatively, taxpayers may 
submit comments electronically via the internet by selecting the ``Tax 
Regs'' option on the IRS Home Page, or by submitting comments directly 
to the IRS internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations generally, 
Sharon L. Hall or Christopher F. Kane of the Office of Assistant Chief 
Counsel (Income Tax & Accounting) at (202) 622-4930; concerning 
partnership adjustments under section 1017, Brian M. Blum of the Office 
of Assistant Chief Counsel (Passthroughs & Special Industries) at (202) 
622-3050; concerning submissions and the hearing, Evangelista C. Lee of 
the Regulations Unit at (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)).
    Comments on the collections of information should be sent to the 
Office of Management and Budget, Attn: Desk Officer for the Department 
of the Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. 
Comments on the collections of information should be received by March 
10, 1997. Comments are specifically requested concerning:
    Whether the proposed collections of information are necessary for 
the proper performance of the functions of the Internal Revenue 
Service, including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collections of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collections of information in this proposed regulation are in 
Secs. 1.108-4(b), 1.1017-1(e)(2), and 1.1017-1(f)(2) (ii) and (iii). 
This information is required for a taxpayer to elect to reduce the 
adjusted bases of depreciable property under section 108(b)(5), to 
elect to treat section 1221(1) real property as either depreciable 
property or depreciable real property, and to account for a partnership 
interest as either depreciable property or depreciable real property. 
This information will be used to determine

[[Page 956]]

whether taxpayers have properly reduced the bases of their properties. 
The collections of information are required to obtain a benefit. The 
likely respondents are individuals, farms, businesses or other for-
profit institutions, and small businesses or organizations.
    Estimated total annual reporting burden: 100,000 hour.
    Estimated average annual burden per respondent: 1 hour.
    Estimated number of respondents: 100,000.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This notice contains proposed amendments to the income tax 
regulations (26 CFR Parts 1 and 301) under sections 108 and 1017 of the 
Internal Revenue Code of 1986 (Code). The amendments are proposed to 
conform the regulations to amendments to sections 108 and 1017 made by 
the Bankruptcy Tax Act of 1980, Pub. L. 96-589, Sec. 2, 94 Stat. 3389 
(1980), 1980-2 C.B. 607 (Bankruptcy Tax Act); the Technical Corrections 
Act of 1982, Pub. L. 97-448, Sec. 102(h)(1), 96 Stat. 2365, 2372 
(1983), 1983-1 C.B. 451; the Deficit Reduction Act of 1984, Pub. L. 98-
369, Secs. 474(r)(5) and 721(b)(2), 98 Stat. 494, 839, 966 (1984), 
1984-3 C.B. (Vol. 1) 1; the Tax Reform Act of 1986, Pub. L. 99-514, 
Secs. 104(b)(2), 231(d)(3)(D), 822, and 1171(b)(4), 100 Stat. 2085, 
2105, 2179, 2373, 2513 (1986), 1986-3 C.B. (Vol. 1) 2; and the Omnibus 
Budget Reconciliation Act of 1993, Pub. L. 103-66, Sec. 13150, 107 
Stat. 312, 446 (1993), 1993-3 C.B. 1.
    In general, section 108 excludes from gross income discharges of 
indebtedness if the discharge occurs in a title 11 case or when the 
taxpayer is insolvent, or if the indebtedness is ``qualified farm 
indebtedness'' or ``qualified real property business indebtedness.'' 
Taxpayers generally must reduce specified tax attributes, including 
adjusted bases of properties, to the extent income from discharge of 
indebtedness is excluded from gross income under section 108. Section 
1017 provides rules regarding any basis reductions required by, or 
elected under, section 108.

Explanation of Provisions

Overview

    The legislative history of the Bankruptcy Tax Act states that the 
exclusion of discharge of indebtedness (COD income) from gross income 
under section 108 is intended to promote a debtor's fresh start. S. 
Rep. No. 1035, 96th Cong., 2d Sess. 10 (1980), 1980-2 C.B. 620, 624; 
H.R. Rep. No. 833, 96th Cong., 2d Sess. 11 (1980). The exclusion 
provided by the statute generally operates, however, to defer, rather 
than eliminate, income from discharge of indebtedness.
    The deferral of income provided by statute is generally achieved by 
requiring a taxpayer to reduce specified tax attributes (including 
adjusted bases of property) under section 108(b) by an amount equal to 
the COD income excluded from gross income under section 108(a). Section 
108(b)(2) requires a taxpayer to reduce tax attributes in the following 
order: (A) net operating loss; (B) general business credit; (C) minimum 
tax credit; (D) capital loss carryovers; (E) adjusted bases of 
property; (F) passive activity loss and credit carryovers; and (G) 
foreign tax credit carryovers. If the excluded COD income exceeds the 
sum of the taxpayer's tax attributes, the excess is permanently 
excluded from the taxpayer's gross income.
    When basis reductions are necessary, section 1017(a) requires the 
taxpayer to reduce the adjusted bases of property held on the first day 
of the following tax year. Section 1017(b)(1) provides that the amount 
of the basis reduction required under section 1017(a), and the 
particular properties the bases of which are to be reduced, shall be 
determined under regulations.

General Rules for Basis Reduction

    Consistent with the legislative history of the Bankruptcy Tax Act, 
the proposed regulations generally retain the ``tracing'' approach of 
the existing regulations issued under prior law. Thus, the proposed 
regulations require a taxpayer to reduce the adjusted basis of the 
property that secured the discharged indebtedness before reducing the 
adjusted bases of other property.
    In addition, the proposed regulations modify the categories in the 
existing regulations to simplify the process of basis reduction. First, 
the distinction between purchase-money indebtedness and other secured 
indebtedness is eliminated. Second, the order of basis reduction for 
property that secured discharged indebtedness is changed. Thus, the 
first category of the general ordering rule is real property used in 
the taxpayer's trade or business or held for the production of income 
(other than section 1221(1) real property) that secured the discharged 
indebtedness, and the second category is personal property used in the 
taxpayer's trade or business or held for the production of income 
(other than inventory, accounts receivable, and notes receivable) that 
secured the discharged indebtedness. Therefore, if an indebtedness 
secured by a building, a parcel of land used in the taxpayer's trade or 
business, office equipment, and office furniture is discharged, the 
taxpayer proportionately reduces the adjusted bases of the building and 
the parcel of land, based upon their relative adjusted bases, to the 
full extent of the excluded COD income before reducing the adjusted 
bases of the office equipment and the office furniture. The IRS and 
Treasury Department believe that this modification of the current 
regulations will simplify the process of basis reduction for many 
taxpayers.

Special Rules for Depreciable Properties

    Instead of reducing tax attributes in the order specified by 
section 108(b)(2), a taxpayer may elect under section 108(b)(5) first 
to reduce the adjusted bases of depreciable property (real and 
personal) to the extent of the excluded COD income. If the adjusted 
bases of depreciable property are insufficient to offset the entire 
amount of excluded COD income, the taxpayer must reduce any remaining 
tax attributes in the order specified in section 108(b)(2). Section 
108(c) requires that excluded COD income from the cancellation of 
qualified real property business indebtedness must be applied against 
depreciable real property.
    Section 1017(b)(3)(C) provides that a taxpayer must treat a 
partnership interest as depreciable property when reducing adjusted 
bases under section 108(b)(5), and as depreciable real property when 
reducing adjusted bases under section 108(c), to the extent the 
partnership correspondingly reduces the partner's proportionate 
interest in the adjusted bases of depreciable property (or depreciable 
real property) held by the partnership (inside basis).
    The proposed regulations generally provide that a taxpayer may 
freely choose whether or not to request that a partnership reduce the 
partner's share of depreciable basis in partnership property and 
thereby permit the taxpayer to treat the partnership interest

[[Page 957]]

as depreciable property (or depreciable real property). In addition, 
the proposed regulations generally provide that the partnership is free 
to grant or deny its consent. In order to prevent avoidance of the 
general ordering rules of the proposed regulations through the use of 
partnerships, however, a partner is required to request consent if the 
partner owns (directly or indirectly) more than 50 percent of the 
capital and profits interests of the partnership, or if the partner 
receives a distributive share of COD income from the partnership. In 
addition, the partnership is required to grant consent if requests are 
made by partners owning (directly or indirectly) an aggregate of more 
than 50 percent of the capital and profits interests of the 
partnership.
    The proposed regulations provide that a partner requesting a 
reduction in inside basis must make the request before the due date 
(including extensions) for filing the partner's Federal income tax 
return for the taxable year in which the partner has COD income. A 
partnership that consents to a basis reduction must include a consent 
statement with its Form 1065, U.S. Partnership Return of Income, and 
must also provide a copy of that statement to the affected partner on 
or before the date the Form 1065 is filed. The IRS and Treasury 
Department recognize that under current law a partner may not always 
have sufficient information with which to decide to request a basis 
reduction until on, or shortly before, the due date (including 
extensions) for filing the partner's tax return. For example, for 
calendar year taxpayers, a partner's tax return and a partnership's 
Form 1065 are generally due on the same day. See sections 6031 and 
6072. Comments are requested as to whether additional rules (such as 
requiring a partnership to inform partners of COD income prior to the 
date the Form 1065 is filed) are necessary to ensure that information 
is exchanged between the partnership and its partners in a timely 
fashion.
    The proposed regulations remove Sec. 301.9100-13T, which governs 
elections under section 108(b)(5), and add new proposed Sec. 1.108-4. 
Under the temporary regulations, a taxpayer is required to make the 
election with the taxpayer's Federal income tax return for the taxable 
year in which the discharge occurs, but is permitted to file an 
election with an amended return, or claim for credit or refund, if the 
taxpayer establishes reasonable cause for failing to file the election 
with the original return. New proposed Sec. 1.108-4 requires the 
taxpayer to make the election on the timely filed (including 
extensions) Federal income tax return for the taxable year the taxpayer 
has COD income that is excluded under section 108(a). Therefore, a 
taxpayer that fails to make the election on that return must request 
the Commissioner's consent to file a late election under Sec. 301.9100-
3T or any regulations that supersede Sec. 301.9100-3T.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking will be submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business. Initial Regulatory Flexibility Act Analysis
    This initial analysis is required under the Regulatory Flexibility 
Act (5 U.S.C. chapter 6). In certain circumstances, the proposed 
regulations will require a partnership to include a statement with its 
Form 1065, U.S. Partnership Return of Income, and provide a copy of 
that statement with the taxpayer's Schedule K-1 (Form 1065), Partner's 
Share of Income, Credits, Deductions, etc., for the taxable year in 
which the COD income is excluded under section 108(a), stating the 
amount of the partner's share of the reduction in the partnership's 
adjusted bases of depreciable real or personal property (inside basis). 
This requirement will ensure that the partner knows it is entitled to 
reduce the adjusted basis of the partnership interest and that the 
affected partnership knows it must reduce the partner's interest in 
inside basis. The legal basis for this requirement is contained in 
sections 1017(b), 6001, and 7805(a).
    Though the proposed regulations might affect any partnership owning 
depreciable property, the IRS and Treasury Department believe that 
partnerships owning depreciable real property are the most likely to be 
affected. Approximately 1,560,000 partnership returns were filed for 
1993. Approximately 620,000 of these were for partnerships owning real 
property. It is unlikely, however, that many of these partnerships will 
be affected by the proposed regulations in any given year.
    After a partner conveys information concerning the amount of COD 
income excluded from gross income under section 108(a) to the affected 
partnership, the partnership must reduce the partner's interest in 
inside basis. Accordingly, the partnership must prepare and maintain 
special entries on its books because this basis reduction will reduce 
the partner's share of the partnership's depreciation deductions, and 
ultimate gain or loss on the sale of the property, in subsequent years. 
In many cases, partnership returns are prepared using computer software 
that can prepare and maintain these special entries after the initial 
year.
    The IRS and Treasury Department are not aware of any federal rules 
that may duplicate, overlap, or conflict with the proposed rule.
    As an alternative to the disclosure described above, the IRS and 
Treasury Department considered, but rejected as too burdensome, a rule 
that would have required an affected partnership to disclose the 
reductions of adjusted basis on a property-by-property basis. There are 
no known alternative rules that are less burdensome to small entities 
but that accomplish the purpose of the statute. The IRS and Treasury 
Department request comments from small entities concerning possible 
alternatives.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for April 29, 1997, at 10 a.m. 
in IRS Auditorium, 7th Floor, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Because of access 
restrictions, visitors will not be admitted beyond the Internal Revenue 
Building lobby more than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments by April 7, 1997 and submit an outline of the 
topics to be discussed and the time to be devoted to each topic (signed 
original and eight (8) copies) by April 3, 1997.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Leo F. Nolan II, 
Office of Assistant Chief Counsel (Income Tax

[[Page 958]]

and Accounting). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for 26 CFR part 1 is amended by 
adding entries in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.108-4 also issued under 26 U.S.C. 108.
    Section 1.108-5 also issued under 26 U.S.C. 108.
    Section 1.1017-1 also issued under 26 U.S.C. 1017.


Sec. 1.108(a)-1  [Removed]

    Par. 2. Section 1.108(a)-1 is removed.


Sec. 1.108(a)-2  [Removed]

    Par. 3. Section 1.108(a)-2 is removed.


Sec. 1.108(b)-1  [Removed]

    Par. 4. Section 1.108(b)-1 is removed.


Sec. 1.1016-7  [Removed]

    Par. 5. Section 1.1016-7 is removed.


Sec. 1.1016-8  [Removed]

    Par. 6-7. Section 1.1016-8 is removed.


Sec. 1.1017-2  [Removed]

    Par. 8. Section 1.1017-2 is removed.
    Par. 9. Section 1.108-4 is added to read as follows:


Sec. 1.108-4  Election to reduce basis of depreciable property under 
section 108(b)(5).

    (a) Description. An election under section 108(b)(5) is available 
whenever a taxpayer excludes discharge of indebtedness (COD income) 
from gross income under sections 108(a)(1)(A), (B), or (C) (concerning 
title 11 cases, insolvency, and qualified farm indebtedness, 
respectively). See sections 108(d)(2) and (3) for the definitions of 
title 11 case and insolvent. See section 108(g)(2) for the definition 
of qualified farm indebtedness.
    (b) Time and manner. To make an election under section 108(b)(5), a 
taxpayer must enter the appropriate information on Form 982, Reduction 
of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 
Basis Adjustment), and attach the form to the timely filed (including 
extensions) Federal income tax return for the taxable year in which the 
taxpayer has COD income that is excluded from gross income under 
section 108(a). An election under this section may be revoked only with 
the consent of the Commissioner.
    (c) Effective date. This section is effective for elections 
concerning discharges of indebtedness occurring on or after the date 
these regulations are published as final regulations in the Federal 
Register.
    Par. 10. Section 1.108-5 is added to read as follows:


Sec. 1.108-5  Limitations on the exclusion of income from the discharge 
of qualified real property business indebtedness.

    (a) Indebtedness in excess of value. The amount excluded from gross 
income under section 108(a)(1)(D) (concerning discharges of qualified 
real property business indebtedness) shall not exceed the excess, if 
any, of the outstanding principal amount of that indebtedness 
immediately before the discharge over the net fair market value of the 
qualifying real property, as defined in Sec. 1.1017-1(c)(1), 
immediately before the discharge. For purposes of this section, net 
fair market value means the fair market value of the qualifying real 
property (notwithstanding section 7701(g)) reduced by the outstanding 
principal amount of any other qualified real property business 
indebtedness secured by that property immediately before and after the 
discharge.
    (b) Overall limitation. The amount excluded from gross income under 
section 108(a)(1)(D) shall not exceed the aggregate adjusted bases of 
all depreciable real property held by the taxpayer immediately before 
the discharge (other than depreciable real property acquired in 
contemplation of the discharge) reduced by the sum of any--
    (1) Depreciation claimed for the taxable year the taxpayer excluded 
discharge of indebtedness from gross income under section 108(a)(1)(D); 
and
    (2) Reductions to the adjusted bases of depreciable real property 
required under section 108(b) or section 108(g) for the same taxable 
year.
    (c) Effective date. This section is effective for discharges of 
qualified real property business indebtedness occurring on or after the 
date these regulations are published as final regulations in the 
Federal Register.
    Par. 11. Section 1.1017-1 is revised to read as follows:


Sec. 1.1017-1  Basis reductions following a discharge of indebtedness.

    (a) General rule for section 108(b)(2)(E). This paragraph (a) 
applies to basis reductions under section 108(b)(2)(E) that are 
required by section 108(a)(1) (A) or (B) because the taxpayer excluded 
discharge of indebtedness (COD income) from gross income. A taxpayer 
must reduce in the following order, to the extent of the excluded COD 
income but not below zero, the adjusted bases of property held on the 
first day of the taxable year following the taxable year that the 
taxpayer excluded COD income from gross income (in proportion to 
adjusted basis):
    (1) Real property used in a trade or business or held for 
investment, other than real property described in section 1221(1), that 
secured the discharged indebtedness immediately before the discharge 
(see paragraph (f)(1) of this section for the treatment of partnership 
indebtedness as indebtedness secured by the taxpayer's interest in the 
partnership);
    (2) Personal property used in a trade or business or held for 
investment, other than inventory, accounts receivable, and notes 
receivable, that secured the indebtedness immediately before the 
discharge (see paragraph (f)(1) of this section for the treatment of 
partnership indebtedness as indebtedness secured by the taxpayer's 
interest in the partnership);
    (3) Remaining property used in a trade or business or held for 
investment, other than inventory, accounts receivable, notes 
receivable, and real property described in section 1221(1);
    (4) Inventory, accounts receivable, notes receivable, and real 
property described in section 1221(1); and
    (5) Property not used in a trade or business nor held for 
investment.
    (b) Operating rules--(1) Prior tax-attribute reduction. The amount 
of excluded COD income applied to reduce basis does not include any COD 
income applied to reduce tax attributes under sections 108(b)(2) (A) 
through (D) and, if applicable, section 108(b)(5). For example, if a 
taxpayer excludes $100 of COD income from gross income under section 
108(a) and reduces tax attributes by $40 under sections 108(b)(2) (A) 
through (D), the taxpayer is required to reduce the adjusted bases of 
property by $60 ($100-$40) under section 108(b)(2)(E).
    (2) Multiple discharged indebtednesses. If a taxpayer has COD

[[Page 959]]

income attributable to more than one discharged indebtedness resulting 
in the reduction of tax attributes under sections 108(b)(2) (A) through 
(D) and, if applicable, section 108(b)(5), paragraph (b)(1) of this 
section must be applied by allocating the tax-attribute reductions 
among the indebtednesses in proportion to the amount of COD income 
attributable to each discharged indebtedness. For example, if a 
taxpayer excludes $20 of COD income attributable to secured 
indebtedness A and excludes $80 of COD income attributable to unsecured 
indebtedness B (a total exclusion of $100), and if the taxpayer reduces 
tax attributes by $40 under sections 108(b)(2) (A) through (D), the 
taxpayer must reduce the amount of COD income attributable to secured 
indebtedness A to $12 ($20 - ($20  $100  x  $40)) and must 
reduce the amount of COD income attributable to unsecured indebtedness 
B to $48 ($80 - ($80  $100  x  $40)).
    (3) Limitation on basis reductions under section 108(b)(2)(E) in 
bankruptcy or insolvency. If COD income arises from a discharge of 
indebtedness in a title 11 case or while the taxpayer is insolvent, the 
amount of any basis reduction under section 108(b)(2)(E) shall not 
exceed the excess of--
    (i) The aggregate of the adjusted bases of property and the amount 
of money held by the taxpayer immediately after the discharge; over
    (ii) The aggregate of the liabilities of the taxpayer immediately 
after the discharge.
    (c) Modification of ordering rules for basis reductions under 
sections 108(b)(5) and 108(c)--(1) In general. The ordering rules 
prescribed in paragraph (a) of this section apply, with appropriate 
modifications, to basis reductions under sections 108 (b)(5) and (c). 
Thus, a taxpayer may reduce only the adjusted bases of depreciable 
property under section 108(b)(5) and may reduce only the adjusted bases 
of depreciable real property under section 108(c). Furthermore, for 
basis reductions under section 108(c), a taxpayer must reduce the 
adjusted basis of the qualifying real property to the extent of the 
discharged qualified real property business indebtedness before 
reducing the adjusted bases of other depreciable real property. The 
term qualifying real property means real property with respect to which 
the indebtedness is qualified real property business indebtedness 
within the meaning of section 108(c)(3). See paragraphs (e) and (f) of 
this section for elections relating to section 1221(1) property and 
partnership interests.
    (2) Partial basis reductions under section 108(b)(5). If the amount 
of basis reductions under section 108(b)(5) is less than the amount of 
the COD income excluded from gross income under section 108(a), the 
taxpayer must reduce the balance of its tax attributes, including any 
remaining adjusted bases of depreciable property, under section 
108(b)(2). For example, if a taxpayer excludes $100 of COD income from 
gross income under section 108(a) and elects to reduce the adjusted 
bases of depreciable property by $10 under section 108(b)(5), the 
taxpayer must reduce its remaining tax attributes by $90 under section 
108(b)(2).
    (3) Modification of fresh start rule for prior basis reductions 
under section 108(b)(5). After reducing the adjusted bases of 
depreciable property under section 108(b)(5), a taxpayer must compute 
the limitation on basis reductions under section 1017(b)(2) using the 
aggregate of the remaining adjusted bases of property. For example, if, 
immediately after the discharge of indebtedness in a title 11 case, a 
taxpayer's adjusted bases of property is $100 and its undischarged 
indebtedness is $70, and if the taxpayer elects to reduce the adjusted 
bases of depreciable property by $10 under section 108(b)(5), section 
1017(b)(2) limits any further basis reductions under section 
108(b)(2)(E) to $20 (($100 - $10) - $70).
    (d) Changes in security. Any change in the property securing an 
indebtedness during the one-year period preceding the discharge of that 
indebtedness shall be disregarded if a principal purpose of that change 
is to affect the taxpayer's basis reductions under section 1017.
    (e) Election to treat section 1221(1) real property as 
depreciable--(1) In general. For basis reductions under sections 108 
(b)(5) and (g), a taxpayer may elect under sections 1017(b) (3)(E) and 
(4)(C), respectively, to treat real property described in section 
1221(1) as depreciable property. This election is not available, 
however, for basis reductions under section 108(c).
    (2) Time and manner. To make an election under section 1017(b) 
(3)(E) or (4)(C), a taxpayer must enter the appropriate information on 
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness 
(and Section 1082 Basis Adjustment), and attach the form to a timely 
filed (including extensions) Federal income tax return for the taxable 
year in which the taxpayer has COD income that is excluded from gross 
income under section 108(a). An election under this paragraph (e) may 
be revoked only with the consent of the Commissioner.
    (f) Partnerships--(1) Partnership COD income. For purposes of 
paragraph (a) of this section, a taxpayer must treat a distributive 
share of a partnership's COD income as attributable to a discharged 
indebtedness secured by the taxpayer's interest in that partnership.
    (2) Partnership interest treated as depreciable property--(i) In 
general. For purposes of making basis reductions, if a taxpayer makes 
an election under section 108 (b)(5) or (c) the taxpayer must treat a 
partnership interest as depreciable property (or depreciable real 
property) to the extent of the partner's proportionate share of the 
partnership's basis in depreciable property (or depreciable real 
property), provided the partnership consents to a corresponding 
reduction in the partnership's basis (inside basis) in depreciable 
property (or depreciable real property) with respect to such partner.
    (ii) Request by partner and consent of partnership--(A) In general. 
Except as otherwise provided in this paragraph (f)(2)(ii), a taxpayer 
may choose whether or not to request that a partnership reduce the 
inside basis of its depreciable property (or depreciable real property) 
with respect to the taxpayer, and the partnership may grant or withhold 
such consent, in its sole discretion. A request by the taxpayer must be 
made before the due date (including extensions) for filing the 
taxpayer's Federal income tax return for the taxable year in which the 
taxpayer has COD income that is excluded from gross income under 
section 108(a).
    (B) Request for consent required. A taxpayer must request a 
partnership's consent to reduce inside basis if the taxpayer owns 
(directly or indirectly) a greater than 50 percent interest in the 
capital and profits of the partnership, or if reductions to the basis 
of the taxpayer's depreciable property (or depreciable real property) 
are being made with respect to the taxpayer's distributive share of COD 
income of the partnership.
    (C) Granting of request required. A partnership must consent to 
reduce its partners' shares of inside basis if consent is requested by 
partners owning (directly or indirectly) an aggregate of more than 50 
percent of the capital and profits interests of the partnership. For 
example, if there is a cancellation of partnership indebtedness 
securing real property used in a partnership's trade or business, and 
if partners owning (in the aggregate) 60 percent of the capital and 
profits interests of the partnership elect to exclude the COD income 
under

[[Page 960]]

section 108(c), the partnership must make the appropriate reductions in 
those partners' shares of inside basis.
    (iii) Partnership consent statement--(A) Partnership requirement. A 
consenting partnership must include with the Form 1065, U.S. 
Partnership Return of Income, for the taxable year of the partnership 
that ends with or within the taxable year the taxpayer excludes COD 
income from gross income under section 108(a), and must provide to the 
taxpayer on or before the date the Form 1065 is filed, a statement 
that--
    (1) Contains the name, address, and taxpayer identification number 
of the partnership; and
    (2) States the amount of the reduction of the partner's 
proportionate interest in the adjusted bases of the partnership's 
depreciable property or depreciable real property, whichever is 
applicable.
    (B) Taxpayer's requirement. Statements described in paragraph 
(f)(2)(iii)(A) of this section must be attached to a taxpayer's timely 
filed (including extensions) Federal income tax return for the taxable 
year in which the taxpayer has COD income that is excluded from gross 
income under section 108(a).
    (iv) Partner's share of partnership's adjusted basis. [Reserved.]
    (3) Partnership basis reduction. The rules of this section 
(including this paragraph (f)), apply in determining the properties to 
which the partnership's basis reductions must be made.
    (g) Special allocation rule for cases to which section 1398 
applies. If a bankruptcy estate and a taxpayer to whom section 1398 
applies (concerning only individuals under Chapter 7 or 11 of title 11 
of the United States Code) hold property subject to basis reduction 
under section 108(b)(2)(E) or (5) on the first day of the taxable year 
following the taxable year of discharge, the bankruptcy estate must 
reduce all of the adjusted bases of its property before the taxpayer is 
required to reduce any adjusted bases of property.
    (h) Effective date. This section is effective for discharges of 
indebtedness occurring on or after the date these regulations are 
published as final regulations in the Federal Register.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 12. The authority citation for part 301 continues to read as 
follows:

    Authority: 26 U.S.C. 7805 * * *


Sec. 301.9100-13T  [Removed]

    Par. 13. Section 301.9100-13T is removed.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 97-154 Filed 1-6-97; 8:45 am]
BILLING CODE 4830-01-U