Td 8787

Federal Register / Vol. 63, No. 204 / Thursday, October 22, 1998 / Rules and Regulations
(ii) * * *
(A) Before any further examinations
are performed or any films are
processed using a component of the
mammography system that failed any of
the tests described in paragraphs (e)(1),
(e)(2), (e)(4)(i), (e)(4)(ii), (e)(4)(iii),
(e)(5)(vi), (e)(6), or (e)(7) of this section;
*
*
*
*
*
(10) Mammography equipment
evaluations. Additional evaluations of
mammography units or image
processors shall be conducted whenever
a new unit or processor is installed, a
unit or processor is disassembled and
reassembled at the same or a new
location, or major components of a
mammography unit or processor
equipment are changed or repaired.
* * *
*
*
*
*
*
(f) * * *
(3) Reviewing interpreting physician.
Each facility shall designate at least one
interpreting physician to review the
medical outcomes audit data at least
once every 12 months. This individual
shall record the dates of the audit period
(s) and shall be responsible for
analyzing results based on this audit.
This individual shall also be responsible
for documenting the results and for
notifying other interpreting physicians
of their results and the facility aggregate
results. If followup actions are taken the
reviewing interpreting physician shall
also be responsible for documenting the
nature of the followup.
*
*
*
*
*
Dated: October 6, 1998.
William K. Hubbard,
Associate Commissioner for Policy
Coordination.
[FR Doc. 98–28148 Filed 10–21–98; 8:45 am]
BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
[TD 8787]
RIN 1545–AU71

Basis Reduction Due to Discharge of
Indebtedness
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:

SUMMARY: This document contains final
and temporary 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
income from gross income under section
108.
DATES: Effective Date: These regulations
are effective October 22, 1998.
Applicability Date: These regulations
apply to discharges of indebtedness
occurring on or after October 22, 1998
and to elections under section 108(b)(5)
concerning discharges of indebtedness
occurring on or after October 22, 1998.
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,
Matthew Lay of the Office of Assistant
Chief Counsel (Passthroughs & Special
Industries) at (202) 622–3050.
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information
contained in this final regulation have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
1539. Responses to these collections of
information are required to obtain a
benefit.
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.
The estimated annual burden per
respondent is 1 hour.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and 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.
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 final regulation contains
amendments to the income tax
regulations (26 CFR Parts 1 and 301)
under sections 108 and 1017 of the

56559

Internal Revenue Code of 1986 (Code).
The amendments conform the
regulations to amendments to sections
108 and 1017 made by the Bankruptcy
Tax Act of 1980, Public Law 96–589,
§§ 2, 94 (Stat. 3389 (1980)); 1980–2 C.B.
607 (Bankruptcy Tax Act); the Technical
Corrections Act of 1982, Public Law 97–
448, § 102(h)(1), 96 (Stat. 2365, 2372
(1983)); 1983–1 C.B. 451; the Deficit
Reduction Act of 1984, Public Law 98–
369, sections 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,
Public Law 99–514, sections 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, Public Law 103–66, section
13150, 107 (Stat. 312, 446 (1993)); 1993–
3 C.B. 1.
On January 7, 1997, proposed
regulations (REG 208172–91), were
published in the Federal Register (62
FR 955). Written comments were
received in response to the notice of
proposed rulemaking. One speaker
provided testimony at a public hearing
held on May 29, 1997.
After consideration of all the
comments, the proposed regulations
under sections 108 and 1017 are
adopted, as revised by this Treasury
decision.
Explanation of Revisions and Summary
of Comments
1. Basis Reduction Limited to Fair
Market Value
One commentator requested that basis
reduction be limited to fair market value
as provided by § 1.1016–7(a) (as
removed by this regulation). The final
regulations do not adopt this
recommendation. Section 1017, as
enacted by the Bankruptcy Tax Act,
fundamentally changed the rules
relating to basis reduction where
discharge of indebtedness income
(cancellation of debt (COD) income) is
excluded from gross income. The
revised statute, in section 1017(b)(2),
provides only one limitation on basis
reduction for insolvent and bankrupt
taxpayers who do not make an election
under section 108(b)(5). Under that rule,
the basis reduction may not exceed the
excess of the aggregate of the bases of
the property held by the taxpayer
immediately after the discharge over the
aggregate of the liabilities of the
taxpayer immediately after the
discharge. The fair market value
limitation found in the regulations
removed by this Treasury decision is
not reflected in section 1017.
Accordingly, the IRS and Treasury

56560

Federal Register / Vol. 63, No. 204 / Thursday, October 22, 1998 / Rules and Regulations

Department do not believe that a rule
limiting basis reduction to fair market
value would be appropriate.
2. Section 108(c)(2)(A) Limitation
Section 1.108–5(a) of the proposed
regulations described the limitation
under section 108(c)(2)(A) and provided
that the amount excluded under section
108(a)(1)(D) (concerning discharges of
qualified real property business
indebtedness) could not exceed the
excess 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
under § 1.1017–1(c)(1)) immediately
before the discharge. Two commentators
requested that the regulations clarify
that any outstanding accrued and
unpaid interest is included in
determining the outstanding principal
amount of the indebtedness for
purposes of this limitation. Given the
purpose of this limitation, which is to
prevent taxpayers from using the section
108(a)(1)(D) exclusion to the extent that
debt cancellation would create equity in
property (H.R. Rep. 103–111, 103d
Cong., 1st Sess., 622–23 (1993)), the IRS
and Treasury Department believe that it
is inappropriate to strictly limit the
exclusion by reference to the amount
stated as principal in the debt
instrument. Accordingly, the final
regulations provide that, for purposes of
section 108(c)(2)(A) and § 1.108–6 only,
outstanding principal amount means the
principal amount of an indebtedness
and all additional amounts owed that,
immediately before the discharge, are
equivalent to principal, in that interest
on such amounts would accrue and
compound in the future. Amounts that
are subject to section 108(e)(2) are
excepted from the definition of
principal amount. In addition, principal
amount must be adjusted to account for
unamortized premium and discount
consistent with section 108(e)(3).
3. Allocation of Basis Reduction of
Multiple Properties Within the Same
Class
The proposed regulations
incorporated the limitation described in
section 1017(b)(2) which provides that
the basis reduction for bankrupt and
insolvent taxpayers may not exceed the
excess of the aggregate of the bases of
the property held by the taxpayer
immediately after the discharge over the
aggregate of the liabilities of the
taxpayer immediately after the
discharge. A commentator suggested
that this limitation be applied on a class
by class basis, so that when a basis
reduction applied within a single class

of properties described in § 1.1017–1(a)
exceeds the amount of basis over the
debt secured by the properties in that
class, the basis reduction in excess of
that amount should default to the next
class.
The final regulations do not adopt this
comment.
The overall limitation on basis
reduction is determined by reference to
the adjusted basis of property and the
amount of money held by the taxpayer
over the liabilities of the taxpayer
‘‘immediately after the discharge.’’ By
contrast, under the basis reduction rules
applicable for purposes of section
108(b)(2)(E), the taxpayer must reduce
the adjusted basis of property ‘‘held by
the taxpayer at the beginning of the
taxable year following the year in which
the discharge occurs.’’ Section 1017(a).
Given the difference in the relevant time
for applying the basis limitation and the
basis reduction rules, and the relative
complexity of the calculations necessary
to implement the proposal, the IRS and
Treasury Department believe that the
suggested limitation is not workable.
Accordingly, the final regulations
continue to apply the limitation based
on the aggregate bases and liabilities of
the taxpayer consistent with section
1017(b)(2).
The proposed regulations also
provided that 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.
The rule in the proposed regulations for
allocating basis reduction among
multiple properties under section
108(b)(2)(E) contained parenthetical
language cross-referencing the
partnership provision for the property
classes that included secured real and
personal property used in a trade or
business or held for investment. This
parenthetical language was intended to
remind taxpayers that partnership
indebtedness is treated as indebtedness
secured by the taxpayer’s interest in the
partnership.
One commentator stated that the
cross-reference with respect to secured
real property was confusing since a
partnership interest presumably should
be treated as personal property in
reducing basis under section
108(b)(2)(E). This is contrasted with the
modified basis reduction rules under
sections 108(b)(5) and 108(c) which,
assuming the appropriate requests are
made and consents are granted, apply a
look-through rule to reduce the inside
basis of depreciable property or
depreciable real property held by a
partnership.

In order to eliminate this confusion,
the parenthetical language is not
included in the final regulations.
However, as under the proposed
regulations, the final regulations
continue to treat a distributive share of
a partnership’s COD income as
attributable to a discharged
indebtedness secured by the taxpayer’s
partnership interest. Accordingly, the
elimination of the parenthetical
language is not intended to change the
substantive results obtained in
allocating a basis reduction among
multiple properties.
4. Meaning of ‘‘in Connection With’’ in
Section 108(c)(3)
A commentator requested that the
final regulations provide that the phrase
‘‘in connection with’’ in section
108(c)(3) does not require that the
proceeds of debt incurred or assumed
before January 1, 1993 be traced to real
property used in a trade or business, but
only requires that the debt be secured by
real property used in a trade or business
as of January 1, 1993. The final
regulations do not adopt this comment.
Section 108(c)(3)(A) defines qualified
real property business indebtedness as
indebtedness which ‘‘was incurred or
assumed by the taxpayer inconnection
with real property used in a trade or
business and is secured by such real
property’’. The IRS and Treasury
Department do not believe that this
sentence should be interpreted to mean
only that the debt must be secured by
real property used in a trade or business
as of January 1, 1993.
5. Basis Reduction With Respect to a
Residence
A commentator requested that when
the basis of a taxpayer’s residence is
reduced under section 1017 and is
disposed of in a transaction subject to
section 1034 (which provided for the
deferral of gain on the sale of a personal
residence), the potential recapture
income arising under section 1245
should be carried into the replacement
property. This comment is not adopted
in the final regulations. Section 1034
was repealed by the Taxpayer Relief Act
of 1997. New section 121, enacted by
the Taxpayer Relief Act of 1997,
exempts certain gain on the sale of a
residence, but does not provide that the
potential gain will be transferred to a
replacement residence. Therefore, under
the new law, there is no mechanism to
preserve the potential recapture income
with respect to a new residence, and the
potential recapture income must be
recognized on the sale of the residence
under section 1245.

Federal Register / Vol. 63, No. 204 / Thursday, October 22, 1998 / Rules and Regulations
6. Mandatory Request and Consent
The proposed regulations provided
that a partner may treat a partnership
interest as depreciable property under
section 108(b)(5) (or as depreciable real
property under section 108(c)) only if
the partnership consents to make
corresponding adjustments to the basis
of the partnership’s depreciable
property (or depreciable real property).
The IRS and Treasury Department
generally believe, in this context, that
whether or not a partnership consents to
make the corresponding adjustments to
the basis of its property should be a
matter of agreement between the partner
and the partnership. Therefore, the
proposed regulations generally provided
that a partner is free to choose whether
or not to request that a partnership
reduce the basis of partnership property
and that the partnership is free to grant
or withhold its consent.
The ability to freely choose whether
or not to request or grant consent,
however, provides opportunities to
avoid the general ordering rules of the
proposed regulations through the use of
a partnership. Therefore, the proposed
regulations provided that, in a limited
number of situations; (i) a partner is
required to request the partnership’s
consent, and (ii) the partnership is
required to grant that consent.
Specifically, the proposed regulations
provided that 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.
One commentator requested revisions
to the mandatory request and consent
rules contained in the proposed
regulations. This commentator argued
that the proposed regulations, as
written, could unduly burden certain
large partnerships in situations where
the partnership’s refusal to consent was
not motivated by tax avoidance. The
commentator requested that the
mandatory consent rule be revised to
require a partnership to consent only if
the partnership receives requests from
five or fewer partners who own, in the
aggregate, more than 50 percent of the
capital and profits of the partnership.
To ensure that partnerships are not
unduly burdened by the mandatory
request and consent rules, the
commentator’s proposal has been

adopted, in part, in the final regulations.
However, to preserve the general
ordering rules of the regulations, the IRS
and Treasury Department believe that it
is appropriate to require a partnership to
consent to reduce the basis of its
depreciable property (or depreciable
real property) where a substantial
majority of its partners elect to exclude
the COD income under sections
108(b)(5) or 108(c). Therefore, the final
regulations provide that a partnership
must consent to reduce its partners’
shares of the partnership’s depreciable
basis in depreciable property (or
depreciable real property) if consent is
requested by; (i) partners owning
(directly or indirectly) an aggregate of
more than 80 percent of the capital and
profits interests of the partnership, or
(ii) five or fewer partners owning
(directly or indirectly) an aggregate of
more than 50 percent of the capital and
profits interests of the partnership.
As in the proposed regulations, the
final regulations do not require a
partnership to reduce the basis of its
depreciable property (or depreciable
real property) in all situations where the
partnership is the source of the COD
income. However, where a partnership
is the source of the COD income and
partners elect to exclude such income,
such partners are required to request
that the partnership reduce its basis in
such property.
Accordingly, if partners meeting the
requirements in (i) or (ii) above elect to
exclude such income, the partnership
must consent to reduce the basis of its
depreciable property (or depreciable
real property).
Commentators also requested that the
final regulations clarify that a
partnership’s consent is not required for
basis adjustments under section
108(b)(2)(E). The final regulations make
it clear that a partnership’s consent to
reduce the basis of the partnership’s
depreciable property (or depreciable
real property) is neither required nor
relevant where a partner reduces the
basis in its partnership interest under
section 108(b)(2)(E).
7. Treatment of the Adjustment to the
Basis of Partnership Property Under
Subchapter K
One commentator requested that the
final regulations address a number of
issues concerning the treatment of the
partnership’s adjustments to the basis of
partnership property under subchapter
K. The final regulations do not address
these issues. Instead, the IRS and
Treasury Department have addressed
these issues in the proposed regulations
recently promulgated under sections
743 and 755.

56561

8. Timing and Reporting
The proposed regulations provided
that a partner requesting a reduction in
inside basis must make the request and
receive consent 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. The proposed
regulations also provided that a
partnership that consents to a basis
reduction must include a consent
statement with its Form 1065, U.S.
Partnership Return of Income, and
provide a copy of that statement to the
affected partner on or before the date the
Form 1065 is filed. One commentator
stated that the final regulations should
provide that; (i) partners should not be
required to request consent, and (ii)
neither the partner nor the partnership
should be required to attach statements
to their returns, until the filing date of
their respective returns for the taxable
year following the year that the partner
excludes COD income.
The IRS and Treasury Department
continue to believe that a partner
electing under sections 108(b)(5) or
108(c) must receive the consent of the
partnership before the partner excludes
the COD income. Therefore, the final
regulations provide that the partner
must request and receive the consent of
the partnership prior to 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. The final regulations
do, however, adopt the commentator’s
suggestion that the partnership is not
required to attach a statement to its
return until the filing date of its Federal
income tax return for the taxable year
following the year that ends with or
within the taxable year that the partner
excludes the COD income.
The commentator also stated that the
final regulations should provide that
when a partnership recognizes any COD
income from qualified real property
business indebtedness it should attach a
statement to its partners’ Forms K–1
stating that the COD income is from
qualified real property business
indebtedness and the date the
cancellation occurred. The final
regulations do not adopt this proposal.
The IRS and Treasury Department
believe that § 1.703–1(a)(1) currently
requires partnerships to separately state
qualified real property business
indebtedness and identify it as such.
The IRS and Treasury Department
recognize that a partner might not
always have sufficient information with
which to decide to request a basis
reduction until on, or shortly before, the

56562

Federal Register / Vol. 63, No. 204 / Thursday, October 22, 1998 / Rules and Regulations

due date (including extensions) for
filing the partner’s Federal income tax
return. Therefore, comments were
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
final regulations do not require
partnerships to inform their partners of
COD income prior to the date the Form
1065 is filed. Instead, the IRS and
Treasury Department believe that any
additional administrative burdens
imposed on partnerships should be the
result of an understanding between the
partners and the partnership.
9. Methods Used Prior to Issuance of
Final Regulations
A commentator requested that, for
cancellation of debt events occurring
prior to the issuance of final regulations,
taxpayers be allowed to use any
reasonable method that conforms with
existing regulations or the proposed
regulations in determining which
properties are subject to the basis
adjustments under sections 108 and
1017. This suggestion to provide for
retroactive application of these
regulations has not been adopted.
Special Analyses
It has been determined that this final
regulation is not a significant regulatory
action as defined in EO 12866.
Therefore, a regulatory assessment is not
required. It has been determined that a
final regulatory flexibility analysis is
required for the collection of
information in this Treasury decision
under 5 U.S.C. 604. A summary of the
analysis is set forth below under the
heading ‘‘Summary of Final Regulatory
Flexibility Act Analysis.’’ Pursuant to
section 7805(f) of the Internal Revenue
Code, this final regulation has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Summary of Final Regulatory
Flexibility Act Analysis
This analysis is required under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6). In certain circumstances, the
final regulations will require a
partnership to include a statement with
its Form 1065, U.S. Partnership Return
of Income, for the taxable year following
the year that ends with or within the
taxable year the taxpayer excludes COD
income from gross income, and provide
a statement to the taxpayer on or before
the due date of the requesting partner’s

return (including extensions) 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 final 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 or partners in these
partnerships will have COD income in
any given year, so it is anticipated that
only a small number of these
partnerships will be affected by the final
regulations in a particular 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
rule in the final regulation.
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.
Drafting Information
The principal authors of these
regulations are Sharon L. Hall, Office of
Assistant Chief Counsel (Income Tax

and Accounting) and Brian Blum, Office
of Assistant Chief Counsel
(Passthroughs and Special Industries).
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.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301 and
602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for 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. * * *

Par. 2. Section 1.108–4 is added to
read as follows.
§ 1.108–4 Election to reduce basis of
depreciable property under section
108(b)(5) of the Internal Revenue Code .

(a) Description. An election under
section 108(b)(5) is available whenever
a taxpayer excludes discharge of
indebtedness income (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

Federal Register / Vol. 63, No. 204 / Thursday, October 22, 1998 / Rules and Regulations
revoked only with the consent of the
Commissioner.
(c) Effective date. This section applies
to elections concerning discharges of
indebtedness occurring on or after
October 22, 1998.
§ 1.108(c)-1

[Redesignated as § 1.108–5]

Par. 3. Section 1.108(c)–1 is
redesignated as § 1.108–5.
Par. 4. Section 1.108–6 is added to
read as follows:
§ 1.108–6 Limitations on the exclusion of
income from the discharge of qualified real
property business indebtedness.

(a) Indebtedness in excess of value.
With respect to any qualified real
property business indebtedness that is
discharged, 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 § 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 qualified real
property business indebtedness (other
than the discharged indebtedness) that
is secured by such property
immediately before and after the
discharge. Also, for purposes of section
108(c)(2)(A) and this section,
outstanding principal amount means the
principal amount of indebtedness
together with all additional amounts
owed that, immediately before the
discharge, are equivalent to principal, in
that interest on such amounts would
accrue and compound in the future,
except that outstanding principal
amount shall not include amounts that
are subject to section 108(e)(2) and shall
be adjusted to account for unamortized
premium and discount consistent with
section 108(e)(3).
(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 applies
to discharges of qualified real property
business indebtedness occurring on or
after October 22, 1998.
§ 1.108(a)–1

[Removed]

Par. 5. Section 1.108(a)–1 is removed.
§ 1.108(a)–2

[Removed]

Par. 6. Section 108(a)–2 is removed.
§ 1.108(b)–1

[Removed]

Par. 7. Section 1.108–(b)–1 is
removed.
§ 1.1016–7

[Removed]

Par. 8. Section 1.1016–7 is removed.
§ 1.1016–8

[Removed]

Par. 9. Section 1.1016–8 is removed.
Par. 10. Section 1.1017–1 is revised to
read as follows:
§ 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;
(2) Personal property used in a trade
or business or held for investment, other
than inventory, accounts receivable, and
notes receivable, that secured the
discharged indebtedness immediately
before the discharge;
(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 taxattribute reduction. The amount of
excluded COD income applied to reduce

56563

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
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 that elects to
reduce basis under section 108(b)(5)
may, to the extent that the election
applies, reduce only the adjusted basis
of property described in paragraphs
(a)(1), (2), and (3) of this section and, if
an election is made under paragraph (f)
of this section, paragraph (a) (4) of this

56564

Federal Register / Vol. 63, No. 204 / Thursday, October 22, 1998 / Rules and Regulations

section. Within paragraphs (a)(1), (2), (3)
and (4) of this section, such a taxpayer
may reduce only the adjusted bases of
depreciable property. A taxpayer that
elects to apply section 108(c) may
reduce only the adjusted basis of
property described in paragraphs (a)(1)
and (3) of this section and, within
paragraphs (a)(1) and (3) of this section,
may reduce only the adjusted bases of
depreciable real property. 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 (f) and
(g) 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 and other property, by
following the ordering rules 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, starting with net operating losses
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. If any
property is added or eliminated as
security for an indebtedness during the
one-year period preceding the discharge

of that indebtedness, such addition or
elimination shall be disregarded where
a principal purpose of the change is to
affect the taxpayer’s basis reductions
under section 1017.
(e) Depreciable property. For purposes
of this section, the term depreciable
property means any property of a
character subject to the allowance for
depreciation or amortization, but only if
the basis reduction would reduce the
amount of depreciation or amortization
which otherwise would be allowable for
the period immediately following such
reduction. Thus, for example, a lessor
cannot reduce the basis of leased
property where the lessee’s obligation in
respect of the property will restore to
the lessor the loss due to depreciation
during the term of the lease, since the
lessor cannot take depreciation in
respect of such property.
(f) Election to treat section 1221(1)
real property as depreciable—(1) In
general. For basis reductions under
section 108(b)(5) and basis reductions
relating to qualified farm indebtedness,
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 (f) may be revoked only with
the consent of the Commissioner.
(g) 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 108(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 that 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
(g)(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, at the
time of the discharge, 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 with
respect to a discharged indebtedness if
consent is requested with respect to that
indebtedness by partners owning
(directly or indirectly) an aggregate of
more than 80 percent of the capital and
profits interests of the partnership or
five or fewer 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 that is secured
by real property used in a partnership’s
trade or business, and if partners
owning (in the aggregate) 90 percent of
the capital and profits interests of the
partnership elect to exclude the COD
income under 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
following the year 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
due date of the taxpayer’s return
(including extensions) for the taxable
year in which the taxpayer excludes

Federal Register / Vol. 63, No. 204 / Thursday, October 22, 1998 / Rules and Regulations
COD income from gross income, 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
(g)(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 (g)) apply in determining the
properties to which the partnership’s
basis reductions must be made.
(h) 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.
(i) Effective date. This section applies
to discharges of indebtedness occurring
on or after October 22, 1998.
§ 1.1017–2

§ 602.101

*

OMB Control numbers.

*
*
(c) * * *

*

*
Current
OMB
control No.

CFR part or section where
identified and described

*
*
*
*
*
1.108–4 .....................................
1545–1539
1.108–5 .....................................
1545–1421
*
*
*
*
*
1.1017–1. ..................................
1545–1539
*

*

*

*

*

2. Removing the following entries in
numerical order from the table:
*
*
*
*
*
CFR part or section where
identified and described

Current
OMB
control No.

*
*
*
*
*
1.108(a)–1 .................................
1545–0046
1.108(a)–2 .................................
1545–0046
1.108(c)–1 .................................
1545–1421
*
*
*
*
*
1.1017–2 ...................................
1545–0028
1545–0046
*
*
*
*
*
301.9100–13T ...........................
1545–0046
Approved: September 14, 1998.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98–28263 Filed 10–21–98; 8:45 am]
BILLING CODE 4830–01–U

[Removed]

Par. 11. Section 1.1017–2 is removed.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 12. The authority citation for part
301 continues to read as follows:
Authority: 26 U.S.C. 7805 * * *
§ 301.9100–13T

[Removed]

Par. 13. Section 301.9100–13T is
removed.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 14. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 15. Section 602.101(c) is
amended by:
1. Adding the following entries in
numerical order to the table:

POSTAL SERVICE
39 CFR Part 111
Mailing OnLine Market Test
Implementation Standards; Changes in
Domestic Classifications and Fees;
Final Rule and Notice
Postal Service.
Final rule.

AGENCY:
ACTION:

This final rule sets forth the
Domestic Mail Manual (DMM)
standards adopted by the Postal Service
to implement the Decision of the
Governors of United States Postal
Service on the Recommended Decision
of the Postal Rate Commission on the
Market Test of Mailing Online, Docket
No. MC98–1.
The Postal Service’s Request to the
Postal Rate Commission proposed, in
part, that the Postal Service be
SUMMARY:

56565

permitted to establish new
classifications and fees for Mailing
Online on a market test basis. The
market test is a limited one involving up
to 5,000 customers, starting in the
northeastern United States, that will
provide a basis for subsequent
nationwide experimental and
permanent services. The experiment is
also the subject of the current Postal
Service Request. Mailing Online is a
service that allows postal customers
with access to a personal computer and
the Internet to transmit electronic
documents to a postal Web site for
subsequent batching and transmission
to a contract printer, who creates and
enters the consequent physical
mailpieces. Payment for postage and
mailpiece preparation is made online
via credit card.
EFFECTIVE DATE: October 22, 1998.
FOR FURTHER INFORMATION CONTACT: Paul
Lettmann, (202) 268–6261, or Kenneth
N. Hollies, (202) 268–3083.
SUPPLEMENTARY INFORMATION: The
Mailing Online market test, an
anticipated precursor of a more
permanent service offering of the Postal
Service, will be of limited impact. Its
purpose is to permit testing of Mailing
Online as one component of PostOffice
Online, a vehicle for the provision of a
variety of services, under conditions
that approximate those sought for a
subsequent experimental service. These
conditions include:
• Use of a hardware and software
platform that can be adapted to the level
of customer use, together with a printer
whose contract prices are the basis for
Mailing Online fees;
• Use of First-Class and Standard
Mail automation presort, rather than
First-Class single-piece, rate categories;
and
• The collection of information to
assist in subsequent mail classification
and service design decisions.
This test is the second of four steps
consisting of an operations test, market
test, and possible experimental and
permanent service. Postal Service data
collection will be focused on mailpiece
information, with collateral emphases
upon resource utilization and costing.
Additional information will also be
collected, such as information
concerning expenditures on the data
links between the postal Web server and
the print site.
The test will be conducted beginning
October 22, 1998, until a time tied to
action on the Request for a Mailing
Online experiment. The test will be
limited to 5,000 active PostOffice
Online registrants located in certain
northeastern ZIP Code areas and in the