§ 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—
(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.
(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—
(d)
Recapture of reductions