§ 301.9100-13T - Elections relating to reduction of basis.

(a) Scope. The regulations prescribed in this section provide rules for making elections under sections 108(b)(5), 108(d)(4), and 1017(b)(3)(E), relating to reduction of basis in connection with discharge of indebtedness.

(b) Availability of elections—(1) Dates relating to discharge of indebtedness. The elections are available to certain taxpayers for the amount of a discharge of indebtedness that may be excluded from gross income under section 108(a), if the discharge occurs after December 31, 1980, unless the discharge occurs in the following cases or proceedings commencing on or before December 31, 1980:

(i) Any case under title 11 of the United States Code or under the Bankruptcy Act and

(ii) A receivership, foreclosure, or similar proceeding in a Federal or State court, or, if the taxpayer is a financial institution to which section 585 or 593 applies, in a Federal or State agency.

For the election to use an earlier effective date in certain circumstances see § 7a.3.

(2) Taxpayers to whom an election is available. The election under section 108(b)(5) is available to taxpayers in a title 11 case or insolvent taxpayers. See section 108(d) (2) and (3) for the definition of the terms “title 11 case” and “insolvent.” The election under section 108(d)(4) is available to taxpayers not in a title 11 case to the extent they are not insolvent after the debt is forgiven. The election under section 1017(b)(3)(E) is available to taxpayers to whom section 1017 applies.

(c) Effect of elections—(1) Election to apply reduction first against depreciable property under section 108(b)(5)—(i) In general. Subject to paragraph (c)(1)(ii) of this section, a taxpayer may elect under section 108(b)(5) to apply any portion of the amount excluded from gross income under section 108(a)(1) (A) or (B) (relating to title 11 cases and insolvency) first to reduce (under the rules of section 1017) the basis of depreciable property (as defined in section 1017(b)(3)). The remaining amount is applied to reduce the tax attributes listed in section 108(b)(2), in the order listed.

(ii) Transitional rule. If the discharge of indebtedness occurs before January 1, 1982, or occurs in a case or proceeding described in paragraph (b)(1) (i) or (ii) of this section commencing before January 1, 1982, and the taxpayer makes the election under section 108(b)(5), the taxpayer may apply any portion of the amount excluded from gross income under section 108(a)(1) (A) or (B) first to reduce (under the rules of section 1017) the basis of depreciable property (as defined in section 1017(b)(3)). The remaining amount is applied to reduce basis under section 108(b)(2)(D). In the case of a discharge of indebtedness covered by this transitional rule, the basis of any property (depreciable or nondepreciable) cannot be reduced under section 1017 below the fair market value of the property on the day the debt is discharged. (See section 7(a)(2) of the Bankruptcy Tax Act of 1980.)

(2) Election to treat certain indebtedness as qualified business indebtedness under section 108(d)(4). Section 108(a)(1)(C) provides an exclusion from gross income of the amount of income attributable to the discharge (in whole or in part) of the taxpayer's qualified business indebtedness. Indebtedness is qualified business indebtedness of the taxpayer only if (i) the indebtedness was incurred or assumed by a corporation, or by an individual in connection with property used in the individual's trade or business, and (ii) such taxpayer makes the election under section 108(d)(4) and this section with respect to the indebtedness. Section 108(a)(1)(C) does not apply to a discharge in a title 11 case, or to a discharge to the extent that the taxpayer is insolvent. If the taxpayer makes the election under this section, the amount excluded from gross income is applied to reduce (under the rules of section 1017) the basis of the taxpayer's depreciable property (as defined in section 1017(b)(3)).

(3) Election to treat certain inventory as depreciable property under section 1017(b)(3)(E). If the amount excluded from gross income under section 108 (relating to discharge of indebtedness) is to be applied to reduce the basis of depreciable property, then the taxpayer may elect to treat all of the taxpayer's real property described in section 1221(1) as depreciable property.

(d) Time and manner—(1) In general. An election under sections 108(b)(5), 108(d)(4), and 1017(b)(3)(E) must be made with the taxpayer's income tax return for the taxable year in which the discharge occurs. However, if the taxpayer establishes to the satisfaction of the Commissioner reasonable cause for failure to file the election with the taxpayer's original return, the taxpayer may file the election with an amended return or claim for credit or refund. The election must be made on a statement attached to a completed Form 982, or on that form itself if the form provides a space for the election. The statement must contain the following:

(i) The name, address, and taxpayer identification number of the taxpayer, and

(ii) A statement that the taxpayer is making the election under section 108(b)(5), 108(d)(4), or 1017(b)(3)(E), as the case may be.

Because the regulations under section 1017 have not been amended to reflect the provisions of the Bankruptcy Tax Act of 1980, a taxpayer making an election under this section does not consent, by completing Form 982, to application of the regulations contained in 26 CFR 1.1017-1 and 1.1017-2 (Rev. April 1, 1980).

(2) Special rule. If the taxpayer's income tax return for the year of the discharge has been filed (or is due) before July 6, 1981, the taxpayer can make the election with an amended return filed before September 3, 1981.

(e) Revocability of election. An election under section 108(b)(5), 108(d)(4), or 1017(b)(3)(E) may be revoked only with the consent of the Commissioner.