26 U.S.C. § 108 : US Code - Section 108: Income from discharge of indebtedness

Search 26 U.S.C. § 108 : US Code - Section 108: Income from discharge of indebtedness

(a) Exclusion from gross income
(1) In general
Gross income does not include any amount which (but for this
subsection) would be includible in gross income by reason of the
discharge (in whole or in part) of indebtedness of the taxpayer
if -
(A) the discharge occurs in a title 11 case,
(B) the discharge occurs when the taxpayer is insolvent,
(C) the indebtedness discharged is qualified farm
indebtedness, or
(D) in the case of a taxpayer other than a C corporation, the
indebtedness discharged is qualified real property business
indebtedness.
(2) Coordination of exclusions
(A) Title 11 exclusion takes precedence
Subparagraphs (B), (C), and (D) of paragraph (1) shall not
apply to a discharge which occurs in a title 11 case.
(B) Insolvency exclusion takes precedence over qualified farm
exclusion and qualified real property business exclusion
Subparagraphs (C) and (D) of paragraph (1) shall not apply to
a discharge to the extent the taxpayer is insolvent.
(3) Insolvency exclusion limited to amount of insolvency
In the case of a discharge to which paragraph (1)(B) applies,
the amount excluded under paragraph (1)(B) shall not exceed the
amount by which the taxpayer is insolvent.
(b) Reduction of tax attributes
(1) In general
The amount excluded from gross income under subparagraph (A),
(B), or (C) of subsection (a)(1) shall be applied to reduce the
tax attributes of the taxpayer as provided in paragraph (2).
(2) Tax attributes affected; order of reduction
Except as provided in paragraph (5), the reduction referred to
in paragraph (1) shall be made in the following tax attributes in
the following order:
(A) NOL
Any net operating loss for the taxable year of the discharge,
and any net operating loss carryover to such taxable year.
(B) General business credit
Any carryover to or from the taxable year of a discharge of
an amount for purposes for determining the amount allowable as
a credit under section 38 (relating to general business
credit).
(C) Minimum tax credit
The amount of the minimum tax credit available under section
53(b) as of the beginning of the taxable year immediately
following the taxable year of the discharge.
(D) Capital loss carryovers
Any net capital loss for the taxable year of the discharge,
and any capital loss carryover to such taxable year under
section 1212.
(E) Basis reduction
(i) In general
The basis of the property of the taxpayer.
(ii) Cross reference
For provisions for making the reduction described in clause
(i), see section 1017.
(F) Passive activity loss and credit carryovers
Any passive activity loss or credit carryover of the taxpayer
under section 469(b) from the taxable year of the discharge.
(G) Foreign tax credit carryovers
Any carryover to or from the taxable year of the discharge
for purposes of determining the amount of the credit allowable
under section 27.
(3) Amount of reduction
(A) In general
Except as provided in subparagraph (B), the reductions
described in paragraph (2) shall be one dollar for each dollar
excluded by subsection (a).
(B) Credit carryover reduction
The reductions described in subparagraphs (B), (C), and (G)
shall be 33 1/3 cents for each dollar excluded by subsection
(a). The reduction described in subparagraph (F) in any passive
activity credit carryover shall be 33 1/3 cents for each
dollar excluded by subsection (a).
(4) Ordering rules
(A) Reductions made after determination of tax for year
The reductions described in paragraph (2) shall be made after
the determination of the tax imposed by this chapter for the
taxable year of the discharge.
(B) Reductions under subparagraph (A) or (D) of paragraph (2)
The reductions described in subparagraph (A) or (D) of
paragraph (2) (as the case may be) shall be made first in the
loss for the taxable year of the discharge and then in the
carryovers to such taxable year in the order of the taxable
years from which each such carryover arose.
(C) Reductions under subparagraphs (B) and (G) of paragraph (2)
The reductions described in subparagraphs (B) and (G) of
paragraph (2) shall be made in the order in which carryovers
are taken into account under this chapter for the taxable year
of the discharge.
(5) Election to apply reduction first against depreciable
property
(A) In general
The taxpayer may elect to apply any portion of the reduction
referred to in paragraph (1) to the reduction under section
1017 of the basis of the depreciable property of the taxpayer.
(B) Limitation
The amount to which an election under subparagraph (A)
applies shall not exceed the aggregate adjusted bases of the
depreciable property held by the taxpayer as of the beginning
of the taxable year following the taxable year in which the
discharge occurs.
(C) Other tax attributes not reduced
Paragraph (2) shall not apply to any amount to which an
election under this paragraph applies.
(c) Treatment of discharge of qualified real property business
indebtedness
(1) Basis reduction
(A) In general
The amount excluded from gross income under subparagraph (D)
of subsection (a)(1) shall be applied to reduce the basis of
the depreciable real property of the taxpayer.
(B) Cross reference
For provisions making the reduction described in subparagraph
(A), see section 1017.
(2) Limitations
(A) Indebtedness in excess of value
The amount excluded under subparagraph (D) of subsection
(a)(1) with respect to any qualified real property business
indebtedness shall not exceed the excess (if any) of -
(i) the outstanding principal amount of such indebtedness
(immediately before the discharge), over
(ii) the fair market value of the real property described
in paragraph (3)(A) (as of such time), reduced by the
outstanding principal amount of any other qualified real
property business indebtedness secured by such property (as
of such time).
(B) Overall limitation
The amount excluded under subparagraph (D) of subsection
(a)(1) shall not exceed the aggregate adjusted bases of
depreciable real property (determined after any reductions
under subsections (b) and (g)) held by the taxpayer immediately
before the discharge (other than depreciable real property
acquired in contemplation of such discharge).
(3) Qualified real property business indebtedness
The term "qualified real property business indebtedness" means
indebtedness which -
(A) was incurred or assumed by the taxpayer in connection
with real property used in a trade or business and is secured
by such real property,
(B) was incurred or assumed before January 1, 1993, or if
incurred or assumed on or after such date, is qualified
acquisition indebtedness, and
(C) with respect to which such taxpayer makes an election to
have this paragraph apply.
Such term shall not include qualified farm indebtedness.
Indebtedness under subparagraph (B) shall include indebtedness
resulting from the refinancing of indebtedness under subparagraph
(B) (or this sentence), but only to the extent it does not exceed
the amount of the indebtedness being refinanced.
(4) Qualified acquisition indebtedness
For purposes of paragraph (3)(B), the term "qualified
acquisition indebtedness" means, with respect to any real
property described in paragraph (3)(A), indebtedness incurred or
assumed to acquire, construct, reconstruct, or substantially
improve such property.
(5) Regulations
The Secretary shall issue such regulations as are necessary to
carry out this subsection, including regulations preventing the
abuse of this subsection through cross-collateralization or other
means.
(d) Meaning of terms; special rules relating to certain provisions
(1) Indebtedness of taxpayer
For purposes of this section, the term "indebtedness of the
taxpayer" means any indebtedness -
(A) for which the taxpayer is liable, or
(B) subject to which the taxpayer holds property.
(2) Title 11 case
For purposes of this section, the term "title 11 case" means a
case under title 11 of the United States Code (relating to
bankruptcy), but only if the taxpayer is under the jurisdiction
of the court in such case and the discharge of indebtedness is
granted by the court or is pursuant to a plan approved by the
court.
(3) Insolvent
For purposes of this section, the term "insolvent" means the
excess of liabilities over the fair market value of assets. With
respect to any discharge, whether or not the taxpayer is
insolvent, and the amount by which the taxpayer is insolvent,
shall be determined on the basis of the taxpayer's assets and
liabilities immediately before the discharge.
[(4) Repealed. Pub. L. 99-514, title VIII, Sec. 822(b)(3)(A),
Oct. 22, 1986, 100 Stat. 2373]
(5) Depreciable property
The term "depreciable property" has the same meaning as when
used in section 1017.
(6) Certain provisions to be applied at partner level
In the case of a partnership, subsections (a), (b), (c), and
(g) shall be applied at the partner level.
(7) Special rules for S corporation
(A) Certain provisions to be applied at corporate level
In the case of an S corporation, subsections (a), (b), (c),
and (g) shall be applied at the corporate level, including by
not taking into account under section 1366(a) any amount
excluded under subsection (a) of this section.
(B) Reduction in carryover of disallowed losses and deductions
In the case of an S corporation, for purposes of subparagraph
(A) of subsection (b)(2), any loss or deduction which is
disallowed for the taxable year of the discharge under section
1366(d)(1) shall be treated as a net operating loss for such
taxable year. The preceding sentence shall not apply to any
discharge to the extent that subsection (a)(1)(D) applies to
such discharge.
(C) Coordination with basis adjustments under section
1367(b)(2)
For purposes of subsection (e)(6), a shareholder's adjusted
basis in indebtedness of an S corporation shall be determined
without regard to any adjustments made under section
1367(b)(2).
(8) Reductions of tax attributes in title 11 cases of individuals
to be made by estate
In any case under chapter 7 or 11 of title 11 of the United
States Code to which section 1398 applies, for purposes of
paragraphs (1) and (5) of subsection (b) the estate (and not the
individual) shall be treated as the taxpayer. The preceding
sentence shall not apply for purposes of applying section 1017 to
property transferred by the estate to the individual.
(9) Time for making election, etc.
(A) Time
An election under paragraph (5) of subsection (b) or under
paragraph (3)(C) of subsection (c) 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.
(B) Revocation only with consent
An election referred to in subparagraph (A), once made, may
be revoked only with the consent of the Secretary.
(C) Manner
An election referred to in subparagraph (A) shall be made in
such manner as the Secretary may by regulations prescribe.
(10) Cross reference
For provision that no reduction is to be made in the basis of
exempt property of an individual debtor, see section
1017(c)(1).
(e) General rules for discharge of indebtedness (including
discharges not in title 11 cases or insolvency)
For purposes of this title -
(1) No other insolvency exception
Except as otherwise provided in this section, there shall be no
insolvency exception from the general rule that gross income
includes income from the discharge of indebtedness.
(2) Income not realized to extent of lost deductions
No income shall be realized from the discharge of indebtedness
to the extent that payment of the liability would have given rise
to a deduction.
(3) Adjustments for unamortized premium and discount
The amount taken into account with respect to any discharge
shall be properly adjusted for unamortized premium and
unamortized discount with respect to the indebtedness discharged.
(4) Acquisition of indebtedness by person related to debtor
(A) Treated as acquisition by debtor
For purposes of determining income of the debtor from
discharge of indebtedness, to the extent provided in
regulations prescribed by the Secretary, the acquisition of
outstanding indebtedness by a person bearing a relationship to
the debtor specified in section 267(b) or 707(b)(1) from a
person who does not bear such a relationship to the debtor
shall be treated as the acquisition of such indebtedness by the
debtor. Such regulations shall provide for such adjustments in
the treatment of any subsequent transactions involving the
indebtedness as may be appropriate by reason of the application
of the preceding sentence.
(B) Members of family
For purposes of this paragraph, sections 267(b) and 707(b)(1)
shall be applied as if section 267(c)(4) provided that the
family of an individual consists of the individual's spouse,
the individual's children, grandchildren, and parents, and any
spouse of the individual's children or grandchildren.
(C) Entities under common control treated as related
For purposes of this paragraph, two entities which are
treated as a single employer under subsection (b) or (c) of
section 414 shall be treated as bearing a relationship to each
other which is described in section 267(b).
(5) Purchase-money debt reduction for solvent debtor treated as
price reduction
If -
(A) the debt of a purchaser of property to the seller of such
property which arose out of the purchase of such property is
reduced,
(B) such reduction does not occur -
(i) in a title 11 case, or
(ii) when the purchaser is insolvent, and
(C) but for this paragraph, such reduction would be treated
as income to the purchaser from the discharge of indebtedness,
then such reduction shall be treated as a purchase price
adjustment.
(6) Indebtedness contributed to capital
Except as provided in regulations, for purposes of determining
income of the debtor from discharge of indebtedness, if a debtor
corporation acquires its indebtedness from a shareholder as a
contribution to capital -
(A) section 118 shall not apply, but
(B) such corporation shall be treated as having satisfied the
indebtedness with an amount of money equal to the shareholder's
adjusted basis in the indebtedness.
(7) Recapture of gain on subsequent sale of stock
(A) In general
If a creditor acquires stock of a debtor corporation in
satisfaction of such corporation's indebtedness, for purposes
of section 1245 -
(i) such stock (and any other property the basis of which
is determined in whole or in part by reference to the
adjusted basis of such stock) shall be treated as section
1245 property,
(ii) the aggregate amount allowed to the creditor -
(I) as deductions under subsection (a) or (b) of section
166 (by reason of the worthlessness or partial
worthlessness of the indebtedness), or
(II) as an ordinary loss on the exchange,
shall be treated as an amount allowed as a deduction for
depreciation, and
(iii) an exchange of such stock qualifying under section
354(a), 355(a), or 356(a) shall be treated as an exchange to
which section 1245(b)(3) applies.
The amount determined under clause (ii) shall be reduced by the
amount (if any) included in the creditor's gross income on the
exchange.
(B) Special rule for cash basis taxpayers
In the case of any creditor who computes his taxable income
under the cash receipts and disbursements method, proper
adjustment shall be made in the amount taken into account under
clause (ii) of subparagraph (A) for any amount which was not
included in the creditor's gross income but which would have
been included in such gross income if such indebtedness had
been satisfied in full.
(C) Stock of parent corporation
For purposes of this paragraph, stock of a corporation in
control (within the meaning of section 368(c)) of the debtor
corporation shall be treated as stock of the debtor
corporation.
(D) Treatment of successor corporation
For purposes of this paragraph, the term "debtor corporation"
includes a successor corporation.
(E) Partnership rule
Under regulations prescribed by the Secretary, rules similar
to the rules of the foregoing subparagraphs of this paragraph
shall apply with respect to the indebtedness of a partnership.
(8) Indebtedness satisfied by corporate stock or partnership
interest
For purposes of determining income of a debtor from discharge
of indebtedness, if -
(A) a debtor corporation transfers stock, or
(B) a debtor partnership transfers a capital or profits
interest in such partnership,
to a creditor in satisfaction of its recourse or nonrecourse
indebtedness, such corporation or partnership shall be treated as
having satisfied the indebtedness with an amount of money equal
to the fair market value of the stock or interest. In the case of
any partnership, any discharge of indebtedness income recognized
under this paragraph shall be included in the distributive shares
of taxpayers which were the partners in the partnership
immediately before such discharge.
(9) Discharge of indebtedness income not taken into account in
determining whether entity meets REIT qualifications
Any amount included in gross income by reason of the discharge
of indebtedness shall not be taken into account for purposes of
paragraphs (2) and (3) of section 856(c).
(10) Indebtedness satisfied by issuance of debt instrument
(A) In general
For purposes of determining income of a debtor from discharge
of indebtedness, if a debtor issues a debt instrument in
satisfaction of indebtedness, such debtor shall be treated as
having satisfied the indebtedness with an amount of money equal
to the issue price of such debt instrument.
(B) Issue price
For purposes of subparagraph (A), the issue price of any debt
instrument shall be determined under sections 1273 and 1274.
For purposes of the preceding sentence, section 1273(b)(4)
shall be applied by reducing the stated redemption price of any
instrument by the portion of such stated redemption price which
is treated as interest for purposes of this chapter.
(f) Student loans
(1) In general
In the case of an individual, gross income does not include any
amount which (but for this subsection) would be includible in
gross income by reason of the discharge (in whole or in part) of
any student loan if such discharge was pursuant to a provision of
such loan under which all or part of the indebtedness of the
individual would be discharged if the individual worked for a
certain period of time in certain professions for any of a broad
class of employers.
(2) Student loan
For purposes of this subsection, the term "student loan" means
any loan to an individual to assist the individual in attending
an educational organization described in section 170(b)(1)(A)(ii)
made by -
(A) the United States, or an instrumentality or agency
thereof,
(B) a State, territory, or possession of the United States,
or the District of Columbia, or any political subdivision
thereof,
(C) a public benefit corporation -
(i) which is exempt from taxation under section 501(c)(3),
(ii) which has assumed control over a State, county, or
municipal hospital, and
(iii) whose employees have been deemed to be public
employees under State law, or
(D) any educational organization described in section
170(b)(1)(A)(ii) if such loan is made -
(i) pursuant to an agreement with any entity described in
subparagraph (A), (B), or (C) under which the funds from
which the loan was made were provided to such educational
organization, or
(ii) pursuant to a program of such educational organization
which is designed to encourage its students to serve in
occupations with unmet needs or in areas with unmet needs and
under which the services provided by the students (or former
students) are for or under the direction of a governmental
unit or an organization described in section 501(c)(3) and
exempt from tax under section 501(a).
The term "student loan" includes any loan made by an educational
organization described in section 170(b)(1)(A)(ii) or by an
organization exempt from tax under section 501(a) to refinance a
loan to an individual to assist the individual in attending any
such educational organization but only if the refinancing loan is
pursuant to a program of the refinancing organization which is
designed as described in subparagraph (D)(ii).
(3) Exception for discharges on account of services performed for
certain lenders
Paragraph (1) shall not apply to the discharge of a loan made
by an organization described in paragraph (2)(D) if the discharge
is on account of services performed for either such organization.
(4) Payments under National Health Service Corps Loan Repayment
Program and certain State loan repayment programs
In the case of an individual, gross income shall not include
any amount received under section 338B(g) of the Public Health
Service Act or under a State program described in section 338I of
such Act.
(g) Special rules for discharge of qualified farm indebtedness
(1) Discharge must be by qualified person
(A) In general
Subparagraph (C) of subsection (a)(1) shall apply only if the
discharge is by a qualified person.
(B) Qualified person
For purposes of subparagraph (A), the term "qualified person"
has the meaning given to such term by section 49(a)(1)(D)(iv);
except that such term shall include any Federal, State, or
local government or agency or instrumentality thereof.
(2) Qualified farm indebtedness
For purposes of this section, indebtedness of a taxpayer shall
be treated as qualified farm indebtedness if -
(A) such indebtedness was incurred directly in connection
with the operation by the taxpayer of the trade or business of
farming, and
(B) 50 percent or more of the aggregate gross receipts of the
taxpayer for the 3 taxable years preceding the taxable year in
which the discharge of such indebtedness occurs is attributable
to the trade or business of farming.
(3) Amount excluded cannot exceed sum of tax attributes and
business and investment assets
(A) In general
The amount excluded under subparagraph (C) of subsection
(a)(1) shall not exceed the sum of -
(i) the adjusted tax attributes of the taxpayer, and
(ii) the aggregate adjusted bases of qualified property
held by the taxpayer as of the beginning of the taxable year
following the taxable year in which the discharge occurs.
(B) Adjusted tax attributes
For purposes of subparagraph (A), the term "adjusted tax
attributes" means the sum of the tax attributes described in
subparagraphs (A), (B), (C), (D), (F), and (G) of subsection
(b)(2) determined by taking into account $3 for each $1 of the
attributes described in subparagraphs (B), (C), and (G) of
subsection (b)(2) and the attribute described in subparagraph
(F) of subsection (b)(2) to the extent attributable to any
passive activity credit carryover.
(C) Qualified property
For purposes of this paragraph, the term "qualified property"
means any property which is used or is held for use in a trade
or business or for the production of income.
(D) Coordination with insolvency exclusion
For purposes of this paragraph, the adjusted basis of any
qualified property and the amount of the adjusted tax
attributes shall be determined after any reduction under
subsection (b) by reason of amounts excluded from gross income
under subsection (a)(1)(B).