26 U.S.C. § 108: Income from discharge of indebtedness

§ 1.108-2 Acquisition of indebtedness by a person related to the debtor.§ 1.108-3 Intercompany losses and deductions.§ 1.108-4 Election to reduce basis of depreciable property under section 108(b)(5) of the Internal Revenue Code .§ 1.108-5 Time and manner for making election under the Omnibus Budget Reconciliation Act of 1993.§ 1.108-6 Limitations on the exclusion of income from the discharge of qualified real property business indebtedness.§ 1.108-7 Reduction of attributes.§ 1.108-8 Indebtedness satisfied by partnership interest.§ 1.108-9 Application of the bankruptcy and the insolvency provisions of section 108 to grantor trusts and disregarded entities.Prop. § 1.108-5 Proposed 1997 · Limitations on the exclusion of income from the discharge of qualified real property business indebtedness.

Amended 1976, 1980

1980 Pub. L. 96-589 Pub. L. 96–589 completely revised and expanded provisions by specifying the types of indebtedness and by setting out priorities among the exclusions, to reflect the revision of Title 11, Bankruptcy, in 1978.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1951(b)(2)(A), struck out “(a) Special rule of exclusion.—” after “Income from discharge of indebtedness” and struck out subsec. (b) which related to discharge, cancellation, or modification of indebtedness of certain railroad corporations.
1976 Pub. L. 94-455 Pub. L. 94–455, § 1906(b)(13)(A), struck out “or his delegate” after “Secretary”.

Cases: Gitlitz v. Commissioner, 531 U.S. 206 (2001); United States v. Centennial Savings Bank FSB, 499 U.S. 573 (1991)

Forms: Form 982

Final rules 13

(a) Exclusion from gross income

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(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—

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(A) the discharge occurs in a title 11 case,

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(B) the discharge occurs when the taxpayer is insolvent,

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Amended 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1004(a)(1), added subpar. (C).
1986 Pub. L. 99-514 Pub. L. 99–514, § 822(a), struck out subpar. (C) relating to exclusion from gross income if the indebtedness discharged is qualified business indebtedness.

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(D) in the case of a taxpayer other than a C corporation, the indebtedness discharged is qualified real property business indebtedness, or

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(a), added subpar. (D).

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(E) the indebtedness discharged is qualified principal residence indebtedness which is discharged—

Amended 2007, 2008, 2013, 2014, 2015, 2018, 2019, 2020

2020 Pub. L. 116-260 Pub. L. 116–260, § 114(a), substituted “January 1, 2026” for “January 1, 2021” in two places.
2019 Pub. L. 116-94 Pub. L. 116–94, § 101(a), substituted “January 1, 2021” for “January 1, 2018” in two places.
2018 Pub. L. 115-123 Pub. L. 115–123 substituted “January 1, 2018” for “January 1, 2017” in two places.
2015 Pub. L. 114-113 Pub. L. 114–113, § 151(b), substituted “discharged—” for “discharged before January 1, 2017.” and added cls. (i) and (ii).
2015 Pub. L. 114-113 Pub. L. 114–113, § 151(a), substituted “January 1, 2017” for “January 1, 2015”.
2014 Pub. L. 113-295 Pub. L. 113–295 substituted “January 1, 2015” for “January 1, 2014”.
2013 Pub. L. 112-240 Pub. L. 112–240 substituted “January 1, 2014” for “January 1, 2013”.
2008 Pub. L. 110-343 Pub. L. 110–343 substituted “January 1, 2013” for “January 1, 2010”.
2007 Pub. L. 110-142 Pub. L. 110–142, § 2(a), added subpar. (E).

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(i) before January 1, 2026, or

(ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2026.

(2) Coordination of exclusions

Amended 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1004(a)(2), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “Subparagraph (B) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case.”
1986 Pub. L. 99-514 Pub. L. 99–514, § 822(b)(1), substituted “Subparagraph (B) of paragraph (1)” for “Subparagraphs (B) and (C) of paragraph (1)” in subpar. (A), struck out subpar. (A) designation and heading, and struck out subpar. (B) providing that insolvency exclusion takes precedence over qualified business exclusion.

(A) Title 11 exclusion takes precedence Subparagraphs (B), (C), (D), and (E) of paragraph (1) shall not apply to a discharge which occurs in a title 11 case.

Amended 1993, 2007

2007 Pub. L. 110-142 Pub. L. 110–142, § 2(c)(1), substituted “(D), and (E)” for “and (D)”.
1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(c)(1), substituted “, (C), and (D)” for “and (C)”.

(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.

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(c)(2), amended heading and text of subpar. (B) generally. Prior to amendment, text read as follows: “Subparagraph (C) of paragraph (1) shall not apply to a discharge to the extent the taxpayer is insolvent.”

(C) Principal residence exclusion takes precedence over insolvency exclusion unless elected otherwise Paragraph (1)(B) shall not apply to a discharge to which paragraph (1)(E) applies unless the taxpayer elects to apply paragraph (1)(B) in lieu of paragraph (1)(E).

Amended 2007

2007 Pub. L. 110-142 Pub. L. 110–142, § 2(c)(2), added subpar. (C).

(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.

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(b) Reduction of tax attributes

Amended 1956, 1960, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1004(a)(3), struck out “in title 11 case or insolvency” after “Reduction of tax attributes” in heading and substituted “subparagraph (A), (B), or (C)” for “subparagraph (A) or (B)” in text of par. (1).
1960 Pub. L. 86-496 Pub. L. 86–496 provided that if the discharge, cancellation, or modification of any indebtedness is effected pursuant to a court order in a receivership proceeding or in a proceeding under section 77 of the Bankruptcy Act, commenced before Jan. 1, 1960, then no amount is to be included in gross income with respect to it, and struck out provisions which made subsection inapplicable to discharges occurring in a taxable year beginning after Dec. 31, 1957.
1956 Act June 29, 1956, substituted “December 31, 1957” for “December 31, 1955”.

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(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).

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(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:

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(A) NOL Any net operating loss for the taxable year of the discharge, and any net operating loss carryover to such taxable year.

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(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).

Amended 1983, 1984, 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 231(d)(3)(D), substituted “General business credit” for “Research credit and general business credit” in heading and amended text, as amended by this Act (Pub. L. 99–514, § 1171(b)(4) (see below)), generally. Prior to amendment, text read as follows: “Any carryover to or from the taxable year of a discharge of an amount for purposes of determining the amount allowable as a credit under—
“(i) section 30 (relating to credit for increasing research activities), or
“(ii) section 38 (relating to general business credit).
For purposes of this subparagraph, there shall not be taken into account any portion of a carryover which is attributable to the employee stock ownership credit determined under section 41.”
1986 Pub. L. 99-514 Pub. L. 99–514, § 1171(b)(4), struck out last sentence which had been eliminated by the general amendment of subpar. (B) by Pub. L. 99–514, § 231(d)(3)(D). See above.
1984 Pub. L. 98-369 Pub. L. 98–369, § 474(r)(5), substituted provisions relating to research credits and general business credits covering carryovers to or from the taxable year of a discharge of an amount for purposes of determining the amount allowable as a credit under section 30 (relating to credit for increasing research activities), or section 38 (relating to general business credit), and directing that there shall not be taken into account any portion of a carryover which is attributable to the employee stock ownership credit determined under section 41 for former provisions covering carryovers to or from the taxable year of the discharge of an amount for purposes of determining the amount of a credit allowable under section 38 (relating to investment in certain depreciable property), section 40 (relating to expenses of work incentive programs), section 44B (relating to credit for employment of certain new employees), section 44E (relating to alcohol used as a fuel), or section 44F (relating to credit for increasing research activities), and directing that, for purposes of clause (i), there could not be taken into account any portion of a carryover which was attributable to the employee plan credit (within the meaning of section 48(o)(3)).
1983 Pub. L. 97-448 Pub. L. 97–448, § 102(h)(1), added cl. (v).

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(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.

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(1), added subpar. (C) and redesignated former subpars. (C) and (D) as (D) and (E), respectively. Former subpar. (E) redesignated (F).

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(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.

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(1), added subpar. (C) and redesignated former subpars. (C) and (D) as (D) and (E), respectively. Former subpar. (E) redesignated (F).

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(E) Basis reduction

Amended 1986, 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(1), added subpar. (C) and redesignated former subpars. (C) and (D) as (D) and (E), respectively. Former subpar. (E) redesignated (F).
1986 Pub. L. 99-514 Pub. L. 99–514, § 1847(b)(7), substituted “section 27” for “section 33”.

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(i) In general The basis of the property of the taxpayer.

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(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.

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(2), added subpar. (F). Former subpar. (F) redesignated (G).
1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(1), redesignated subpar. (E) as (F).

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(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.

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(2), redesignated subpar. (F) as (G).

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(3) Amount of reduction

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 104(b)(2), substituted “33⅓ cents” for “50 cents”.

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(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 33⅓ cents for each dollar excluded by subsection (a). The reduction described in subparagraph (F) in any passive activity credit carryover shall be 33⅓ cents for each dollar excluded by subsection (a).

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(3)(A), amended heading and text of subpar. (B) generally. Prior to amendment, text read as follows: “The reductions described in subparagraphs (B) and (E) of paragraph (2) shall be 33⅓ cents for each dollar excluded by subsection (a).”

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(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.

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(3)(B), substituted “(D)” for “(C)” in heading and text.

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(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.

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(3)(C), substituted “(G)” for “(E)” in heading and text.

(5) Election to apply reduction first against depreciable property

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(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.

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(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.

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(C) Other tax attributes not reduced Paragraph (2) shall not apply to any amount to which an election under this paragraph applies.

Amended 1986, 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(b), added subsec. (c).
1986 Pub. L. 99-514 Pub. L. 99–514, § 822(b)(2), struck out subsec. (c) relating to tax treatment of discharge of qualified business indebtedness.

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(1) Basis reduction

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(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.

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(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—

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(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).

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(3) Qualified real property business indebtedness The term “qualified real property business indebtedness” means indebtedness which—

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(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,

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(B) was incurred or assumed before January 1, 1993, or if incurred or assumed on or after such date, is qualified acquisition indebtedness, and

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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

Amended 1986, 1988, 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(c)(3)(B), substituted “certain provisions” for “subsections (a), (b) and (g)” in heading.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1004(a)(6)(B), which directed amendment of subsec. (d) heading by substituting “subsections (a), (b), and (g)” for “subsections (a), and (b)”, was executed by making the substitution for “subsections (a) and (b)” as the probable intent of Congress.
1986 Pub. L. 99-514 Pub. L. 99–514, § 822(b)(3)(B), struck out reference to subsec. (c) in heading.

(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.

Textual readingALL OF= a title 11 case

“a case under title 11 of the United States Code (relating to bankruptcy)”

“the taxpayer is under the jurisdiction of the court in such case”

“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.

Cases: Merkel v. Commissioner, 192 F.3d 844 (9th Cir. 1999)

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[(4) Repealed. Pub. L. 99–514, title VIII, § 822(b)(3)(A), Oct. 22, 1986, 100 Stat. 2373]

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 822(b)(3)(A), struck out par. (4) relating to treatment of indebtedness as qualified business indebtedness.

(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.

Amended 1982, 1984, 1986, 1988, 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(c)(3)(A), (C), substituted “Certain provisions” for “Subsections (a), (b) and (g)” in heading and “subsections (a), (b), (c), and (g)” for “subsections (a), (b), and (g)” in text.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1004(a)(6)(A), (C), substituted “Subsections (a), (b), and (g)” for “Subsections (a) and (b)” in heading and “subsections (a), (b), and (g)” for “subsections (a) and (b)” in text.
1986 Pub. L. 99-514 Pub. L. 99–514, § 822(b)(3)(B), struck out reference to subsec. (c) in heading and text.
1984 Pub. L. 98-369 Pub. L. 98–369, § 721(b)(2), struck out “or S corporation shareholder level” in heading and second sentence which provided that “In the case of an S corporation, subsections (a), (b), and (c) shall apply at the shareholder level.”. See par. (7)(A).
1982 Pub. L. 97-354 Pub. L. 97–354 inserted “or S corporation shareholder level” in heading and inserted “In the case of an S corporation, subsections (a), (b), and (c) shall be applied at the shareholder level.”

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(7) Special rules for S corporation

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 721(b)(2), added par. (7) and redesignated former pars. (7) to (9) as (8) to (10), respectively.

(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.

Amended 1986, 1988, 1993, 2002

2002 Pub. L. 107-147 Pub. L. 107–147 inserted “, including by not taking into account under section 1366(a) any amount excluded under subsection (a) of this section” before period at end.
1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(c)(3)(A), (C), substituted “Certain provisions” for “Subsections (a), (b) and (g)” in heading and “subsections (a), (b), (c), and (g)” for “subsections (a), (b), and (g)” in text.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1004(a)(6)(A), (C), substituted “Subsections (a), (b), and (g)” for “Subsections (a) and (b)” in heading and “subsections (a), (b), and (g)” for “subsections (a) and (b)” in text.
1986 Pub. L. 99-514 Pub. L. 99–514, § 822(b)(3)(B), struck out reference to subsec. (c) in heading and text.

(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.

Amended 1986, 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(c)(4), inserted at end “The preceding sentence shall not apply to any discharge to the extent that subsection (a)(1)(D) applies to such discharge.”
1986 Pub. L. 99-514 Pub. L. 99–514, § 822(b)(3)(C), struck out “The preceding sentence shall not apply to any discharge to the extent that subsection (a)(1)(C) applies to such discharge.”

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(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.

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 721(b)(2), added par. (7) and redesignated former pars. (7) to (9) as (8) to (10), respectively.

(9) Time for making election, etc.

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 721(b)(2), added par. (7) and redesignated former pars. (7) to (9) as (8) to (10), respectively.

(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.

Amended 1986, 1993, 1996

1996 Pub. L. 104-188 Pub. L. 104–188 substituted “paragraph (3)(C)” for “paragraph (3)(B)”.
1993 Pub. L. 103-66 Pub. L. 103–66, § 13150(c)(5), inserted “or under paragraph (3)(B) of subsection (c)” after “subsection (b)”.
1986 Pub. L. 99-514 Pub. L. 99–514, § 822(b)(3)(D), struck out “under paragraph (4) of this subsection or” after “An election”.

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(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).

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, § 721(b)(2), added par. (7) and redesignated former pars. (7) to (9) as (8) to (10), respectively.

(e) General rules for discharge of indebtedness (including discharges not in title 11 cases or insolvency) For purposes of this title—

Amended 1990, 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(a)(1)(A), redesignated par. (11) as (10) and struck out former par. (10) which related to satisfaction of indebtedness by transfer of corporation’s stock.
1990 Pub. L. 101-508 Pub. L. 101–508, § 11325(a)(1), added par. (11).

(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.

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(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.

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(4) Acquisition of indebtedness by person related to debtor

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(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—

Textual readingALL OF= reduction treated as purchase price adjustment

(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.

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(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—

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(a)(2)(B), substituted “Except as provided in regulations, for” for “For”.

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(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

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 805(c)(3), (4), redesignated subpar. (F) as (E) and substituted “the foregoing subparagraphs” for “subparagraphs (A), (B), (C), (D), and (E)”. Former subpar. (E) redesignated (D).

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(A) In general If a creditor acquires stock of a debtor corporation in satisfaction of such corporation’s indebtedness, for purposes of section 1245—

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(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—

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(I) as deductions under subsection (a) or (b) of section 166 (by reason of the worthlessness or partial worthlessness of the indebtedness), or

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 805(c)(2), substituted “subsection (a) or (b) of section 166” for “subsection (a), (b), or (c) of section 166”.

(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.

Amended 1983

1983 Pub. L. 97-448 Pub. L. 97–448, § 304(d), added cl. (iii).

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.

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 805(c)(3), redesignated subpars. (C) to (E) as (B) to (D), respectively, and struck out former subpar. (B) which related to taxpayers on reserve method.

(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.

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 805(c)(3), redesignated subpars. (C) to (E) as (B) to (D), respectively, and struck out former subpar. (B) which related to taxpayers on reserve method.

(D) Treatment of successor corporation For purposes of this paragraph, the term “debtor corporation” includes a successor corporation.

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 805(c)(3), redesignated subpars. (C) to (E) as (B) to (D), respectively, and struck out former subpar. (B) which related to taxpayers on reserve method.

(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.

Amended 1986

1986 Pub. L. 99-514 Pub. L. 99–514, § 805(c)(3), (4), redesignated subpar. (F) as (E) and substituted “the foregoing subparagraphs” for “subparagraphs (A), (B), (C), (D), and (E)”. Former subpar. (E) redesignated (D).

(8) Indebtedness satisfied by corporate stock or partnership interest For purposes of determining income of a debtor from discharge of indebtedness, if—

“to a creditor in satisfaction of its recourse or nonrecourse indebtedness” Closing words

Textual readingANY OF= treated as satisfied with money equal to value

(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.

Amended 1990, 1993, 2004

2004 Pub. L. 108-357 Pub. L. 108–357, § 896(a), amended heading and text of par. (8) generally. Prior to amendment, text read as follows: “For purposes of determining income of a debtor from discharge of indebtedness, if a debtor corporation transfers stock to a creditor in satisfaction of its indebtedness, such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the stock.”
1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(a)(1)(B), amended heading and text of par. (8) generally. Prior to amendment, text read as follows: “For purposes of determining income of the debtor from discharge of indebtedness, the stock for debt exception shall not apply—
“(A) to the issuance of nominal or token shares, or
“(B) with respect to an unsecured creditor, where the ratio of the value of the stock received by such unsecured creditor to the amount of his indebtedness cancelled or exchanged for stock in the workout is less than 50 percent of a similar ratio computed for all unsecured creditors participating in the workout.
Any stock which is disqualified stock (as defined in paragraph (10)(B)(ii)) shall not be treated as stock for purposes of this paragraph.”
1990 Pub. L. 101-508 Pub. L. 101–508, § 11325(b)(2), inserted provision at end that any stock which is a disqualified stock, as so defined, not be treated as stock for purposes of this paragraph.

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(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

Amended 1984, 1986, 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(a)(1)(A), redesignated par. (11) as (10) and struck out former par. (10) which related to satisfaction of indebtedness by transfer of corporation’s stock.
1986 Pub. L. 99-514 Pub. L. 99–514, § 621(e), repealed the amendment by Pub. L. 98–369, § 59(b)(1), which had added subpar. (C) creating an exception for transfers in certain workouts of the satisfaction of indebtedness by corporation’s stock. See 1984 Amendment note below.
1984 Pub. L. 98-369 Pub. L. 98–369, § 59(a), added par. (10).
1984 Pub. L. 98-369 Pub. L. 98–369, § 59(b)(1), which added subpar. (C), effective as if included in the amendments made by section 806(e) and (f) of Pub. L. 94–455, was repealed by Pub. L. 99–514, § 621(e), (f)(2), eff. Jan. 1, 1986, with certain exceptions, see Effective Date of 1986 Amendment note below.

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(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.

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(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.

Amended 1990

1990 Pub. L. 101-508 Pub. L. 101–508, § 11325(b)(1), substituted heading for one which read: “Exception for title 11 cases and insolvent debtors” and amended text generally. Prior to amendment, text read as follows: “Subparagraph (A) shall not apply in the case of a debtor in a title 11 case or to the extent the debtor is insolvent.”

(g) Special rules for discharge of qualified farm indebtedness

Amended 1986, 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1004(a)(4), substituted “indebtedness” for “indebtedness of solvent farmers” in heading and amended text generally. Prior to amendment, text read as follows:
1988 “(1) In general.—For purposes of this section and section 1017, the discharge by a qualified person of qualified farm indebtedness of a taxpayer who is not insolvent at the time of the discharge shall be treated in the same manner as if the discharge had occurred when the taxpayer was insolvent.
1988 “(2) Qualified farm indebtedness.—For purposes of this subsection, 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 average annual 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.
1988 “(3) Qualified person.—For purposes of this subsection, the term ‘qualified person’ means a person described in section 46(c)(8)(D)(iv).”
1986 Pub. L. 99-514 Pub. L. 99–514, § 405(a), added subsec. (g).

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(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.

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(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.

Amended 1990

1990 Pub. L. 101-508 Pub. L. 101–508, § 11813(b)(6), substituted “section 49(a)(1)(D)(iv)” for “section 46(c)(8)(D)(iv)”.

(2) Qualified farm indebtedness For purposes of this section, indebtedness of a taxpayer shall be treated as qualified farm indebtedness if—

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(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—

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(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.

Amended 1993

1993 Pub. L. 103-66 Pub. L. 103–66, § 13226(b)(3)(D), substituted “subparagraphs (A), (B), (C), (D), (F), and (G)” for “subparagraphs (A), (B), (C), and (E)” and “subparagraphs (B), (C), and (G)” for “subparagraphs (B) and (E)” and inserted before period at end “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.

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(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).

(h) Special rules relating to qualified principal residence indebtedness

Amended 2007

2007 Pub. L. 110-142 Pub. L. 110–142, § 2(b), added subsec. (h).

(1) Basis reduction The amount excluded from gross income by reason of subsection (a)(1)(E) shall be applied to reduce (but not below zero) the basis of the principal residence of the taxpayer.

(2) Qualified principal residence indebtedness For purposes of this section, the term “qualified principal residence indebtedness” means acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting “$750,000 ($375,000” for “$1,000,000 ($500,000” in clause (ii) thereof and determined without regard to the substitution described in section 163(h)(3)(F)(i)(II)) with respect to the principal residence of the taxpayer.

“acquisition indebtedness (within the meaning of section 163(h)(3)(B), applied by substituting “$750,000 ($375,000” for “$1,000,000 ($500,000” in clause (ii) thereof and determined without regard to the substitution described in section 163(h)(3)(F)(i)(II)) with respect to the principal residence of the taxpayer.” Opening words

Textual readingALL OF= qualified principal residence indebtedness

“acquisition indebtedness”

“with respect to the principal residence of the taxpayer”

Amended 2019, 2020

2020 Pub. L. 116-260 Pub. L. 116–260, § 114(b), substituted “$750,000 ($375,000” for “$2,000,000 ($1,000,000”.
2019 Pub. L. 116-94 Pub. L. 116–94, § 101(b), inserted “and determined without regard to the substitution described in section 163(h)(3)(F)(i)(II)” after “clause (ii) thereof”.

(3) Exception for certain discharges not related to taxpayer’s financial condition Subsection (a)(1)(E) shall not apply to the discharge of a loan if the discharge is on account of services performed for the lender or any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer.

“to the discharge of a loan” Opening words

Textual readingANY OF= subsection (a)(1)(E) not applicable

“the discharge is on account of services performed for the lender”

“any other factor not directly related to a decline in the value of the residence or to the financial condition of the taxpayer”

(4) Ordering rule If any loan is discharged, in whole or in part, and only a portion of such loan is qualified principal residence indebtedness, subsection (a)(1)(E) shall apply only to so much of the amount discharged as exceeds the amount of the loan (as determined immediately before such discharge) which is not qualified principal residence indebtedness.

(5) Principal residence For purposes of this subsection, the term “principal residence” has the same meaning as when used in section 121.

(i) Deferral and ratable inclusion of income arising from business indebtedness discharged by the reacquisition of a debt instrument

§ 1.108(i)-0 Definitions and effective/applicability dates.§ 1.108(i)-1 Deferred discharge of indebtedness income and deferred original issue discount deductions of C corporations.§ 1.108(i)-2 Application of section 108(i) to partnerships and S corporations.§ 1.108(i)-3 Rules for the deduction of OID.

Amended 2009

2009 Pub. L. 111-5 Pub. L. 111–5 added subsec. (i).

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(1) In general At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument shall be includible in gross income ratably over the 5-taxable-year period beginning with—

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(A) in the case of a reacquisition occurring in 2009, the fifth taxable year following the taxable year in which the reacquisition occurs, and

(B) in the case of a reacquisition occurring in 2010, the fourth taxable year following the taxable year in which the reacquisition occurs.

(2) Deferral of deduction for original issue discount in debt for debt exchanges

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(A) In general If, as part of a reacquisition to which paragraph (1) applies, any debt instrument is issued for the applicable debt instrument being reacquired (or is treated as so issued under subsection (e)(4) and the regulations thereunder) and there is any original issue discount determined under subpart A of part V of subchapter P of this chapter with respect to the debt instrument so issued—

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(i) except as provided in clause (ii), no deduction otherwise allowable under this chapter shall be allowed to the issuer of such debt instrument with respect to the portion of such original issue discount which—

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(I) accrues before the 1st taxable year in the 5-taxable-year period in which income from the discharge of indebtedness attributable to the reacquisition of the debt instrument is includible under paragraph (1), and

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(II) does not exceed the income from the discharge of indebtedness with respect to the debt instrument being reacquired, and

(ii) the aggregate amount of deductions disallowed under clause (i) shall be allowed as a deduction ratably over the 5-taxable-year period described in clause (i)(I).

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If the amount of the original issue discount accruing before such 1st taxable year exceeds the income from the discharge of indebtedness with respect to the applicable debt instrument being reacquired, the deductions shall be disallowed in the order in which the original issue discount is accrued.

(B) Deemed debt for debt exchanges For purposes of subparagraph (A), if any debt instrument is issued by an issuer and the proceeds of such debt instrument are used directly or indirectly by the issuer to reacquire an applicable debt instrument of the issuer, the debt instrument so issued shall be treated as issued for the debt instrument being reacquired. If only a portion of the proceeds from a debt instrument are so used, the rules of subparagraph (A) shall apply to the portion of any original issue discount on the newly issued debt instrument which is equal to the portion of the proceeds from such instrument used to reacquire the outstanding instrument.

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(3) Applicable debt instrument For purposes of this subsection—

(A) Applicable debt instrument The term “applicable debt instrument” means any debt instrument which was issued by—

“any debt instrument which was issued by—” Opening words

Textual readingANY OF= an applicable debt instrument

(i) a C corporation, or

(ii) any other person in connection with the conduct of a trade or business by such person.

(B) Debt instrument The term “debt instrument” means a bond, debenture, note, certificate, or any other instrument or contractual arrangement constituting indebtedness (within the meaning of section 1275(a)(1)).

(4) Reacquisition For purposes of this subsection—

(A) In general The term “reacquisition” means, with respect to any applicable debt instrument, any acquisition of the debt instrument by—

(i) the debtor which issued (or is otherwise the obligor under) the debt instrument, or

(ii) a related person to such debtor.

(B) Acquisition The term “acquisition” shall, with respect to any applicable debt instrument, include an acquisition of the debt instrument for cash, the exchange of the debt instrument for another debt instrument (including an exchange resulting from a modification of the debt instrument), the exchange of the debt instrument for corporate stock or a partnership interest, and the contribution of the debt instrument to capital. Such term shall also include the complete forgiveness of the indebtedness by the holder of the debt instrument.

(5) Other definitions and rules For purposes of this subsection—

(A) Related person The determination of whether a person is related to another person shall be made in the same manner as under subsection (e)(4).

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(B) Election

(i) In general An election under this subsection with respect to any applicable debt instrument shall be made by including with the return of tax imposed by chapter 1 for the taxable year in which the reacquisition of the debt instrument occurs a statement which—

(I) clearly identifies such instrument, and

(II) includes the amount of income to which paragraph (1) applies and such other information as the Secretary may prescribe.

(ii) Election irrevocable Such election, once made, is irrevocable.

(iii) Pass-thru entities In the case of a partnership, S corporation, or other pass-thru entity, the election under this subsection shall be made by the partnership, the S corporation, or other entity involved.

(C) Coordination with other exclusions If a taxpayer elects to have this subsection apply to an applicable debt instrument, subparagraphs (A), (B), (C), and (D) of subsection (a)(1) shall not apply to the income from the discharge of such indebtedness for the taxable year of the election or any subsequent taxable year.

(D) Acceleration of deferred items

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(i) In general In the case of the death of the taxpayer, the liquidation or sale of substantially all the assets of the taxpayer (including in a title 11 or similar case), the cessation of business by the taxpayer, or similar circumstances, any item of income or deduction which is deferred under this subsection (and has not previously been taken into account) shall be taken into account in the taxable year in which such event occurs (or in the case of a title 11 or similar case, the day before the petition is filed).

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(ii) Special rule for pass-thru entities The rule of clause (i) shall also apply in the case of the sale or exchange or redemption of an interest in a partnership, S corporation, or other pass-thru entity by a partner, shareholder, or other person holding an ownership interest in such entity.

(6) Special rule for partnerships In the case of a partnership, any income deferred under this subsection shall be allocated to the partners in the partnership immediately before the discharge in the manner such amounts would have been included in the distributive shares of such partners under section 704 if such income were recognized at such time. Any decrease in a partner’s share of partnership liabilities as a result of such discharge shall not be taken into account for purposes of section 752 at the time of the discharge to the extent it would cause the partner to recognize gain under section 731. Any decrease in partnership liabilities deferred under the preceding sentence shall be taken into account by such partner at the same time, and to the extent remaining in the same amount, as income deferred under this subsection is recognized.

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(7) Secretarial authority The Secretary may prescribe such regulations, rules, or other guidance as may be necessary or appropriate for purposes of applying this subsection, including—

(A) extending the application of the rules of paragraph (5)(D) to other circumstances where appropriate,

(B) requiring reporting of the election (and such other information as the Secretary may require) on returns of tax for subsequent taxable years, and

(C) rules for the application of this subsection to partnerships, S corporations, and other pass-thru entities, including for the allocation of deferred deductions.