General rules for discharge of indebtedness (including discharges not in title 11 cases or insolvency)
For purposes of this title—
(1) No other insolvency exception
(1)No other insolvency exception#
Except as otherwise provided in this section, there shall be no insolvency exception from the general rule that gross income includes income from the discharge of indebtedness.
(2)Income not realized to extent of lost deductions#
No income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a deduction.
(3)Adjustments for unamortized premium and discount#
The amount taken into account with respect to any discharge shall be properly adjusted for unamortized premium and unamortized discount with respect to the indebtedness discharged.
(4)Acquisition of indebtedness by person related to debtor#
(A) Treated as acquisition by debtor For purposes of determining income of the debtor from discharge of indebtedness, to the extent provided in regulations prescribed by the Secretary, the acquisition of outstanding indebtedness by a person bearing a relationship to the debtor specified in section 267(b) or 707(b)(1) from a person who does not bear such a relationship to the debtor shall be treated as the acquisition of such indebtedness by the debtor. Such regulations shall provide for such adjustments in the treatment of any subsequent transactions involving the indebtedness as may be appropriate by reason of the application of the preceding sentence.
(B) Members of family For purposes of this paragraph, sections 267(b) and 707(b)(1) shall be applied as if section 267(c)(4) provided that the family of an individual consists of the individual’s spouse, the individual’s children, grandchildren, and parents, and any spouse of the individual’s children or grandchildren.
(C) Entities under common control treated as related For purposes of this paragraph, two entities which are treated as a single employer under subsection (b) or (c) of section 414 shall be treated as bearing a relationship to each other which is described in section 267(b).
(4)(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.
(5)Purchase-money debt reduction for solvent debtor treated as price reduction#
If—
(A) the debt of a purchaser of property to the seller of such property which arose out of the purchase of such property is reduced,
(B) such reduction does not occur— (i) in a title 11 case, or (ii) when the purchaser is insolvent, and
(C) but for this paragraph, such reduction would be treated as income to the purchaser from the discharge of indebtedness,
then such reduction shall be treated as a purchase price adjustment.
(5)(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,
(5)(B)#
such reduction does not occur—
(i) in a title 11 case, or
(ii) when the purchaser is insolvent, and
(5)(B)(i)#
in a title 11 case, or
(6)Indebtedness contributed to capital#
Except as provided in regulations, for purposes of determining income of the debtor from discharge of indebtedness, if a debtor corporation acquires its indebtedness from a shareholder as a contribution to capital—
(A) section 118 shall not apply, but
(B) such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness.
(6)(A)#
section 118 shall not apply, but
(6)(B)#
such corporation shall be treated as having satisfied the indebtedness with an amount of money equal to the shareholder’s adjusted basis in the indebtedness.
(7)Recapture of gain on subsequent sale of stock#
(A) In general If a creditor acquires stock of a debtor corporation in satisfaction of such corporation’s indebtedness, for purposes of section 1245— (i) such stock (and any other property the basis of which is determined in whole or in part by reference to the adjusted basis of such stock) shall be treated as section 1245 property, (ii) the aggregate amount allowed to the creditor— (I) as deductions under subsection (a) or (b) of section 166 (by reason of the worthlessness or partial worthlessness of the indebtedness), or (II) as an ordinary loss on the exchange, shall be treated as an amount allowed as a deduction for depreciation, and (iii) an exchange of such stock qualifying under section 354(a), 355(a), or 356(a) shall be treated as an exchange to which section 1245(b)(3) applies. The amount determined under clause (ii) shall be reduced by the amount (if any) included in the creditor’s gross income on the exchange.
(B) Special rule for cash basis taxpayers In the case of any creditor who computes his taxable income under the cash receipts and disbursements method, proper adjustment shall be made in the amount taken into account under clause (ii) of subparagraph (A) for any amount which was not included in the creditor’s gross income but which would have been included in such gross income if such indebtedness had been satisfied in full.
(C) Stock of parent corporation For purposes of this paragraph, stock of a corporation in control (within the meaning of section 368(c)) of the debtor corporation shall be treated as stock of the debtor corporation.
(D) Treatment of successor corporation For purposes of this paragraph, the term “debtor corporation” includes a successor corporation.
(E) Partnership rule Under regulations prescribed by the Secretary, rules similar to the rules of the foregoing subparagraphs of this paragraph shall apply with respect to the indebtedness of a partnership.
(7)(A)In general#
If a creditor acquires stock of a debtor corporation in satisfaction of such corporation’s indebtedness, for purposes of section 1245—
(i) such stock (and any other property the basis of which is determined in whole or in part by reference to the adjusted basis of such stock) shall be treated as section 1245 property,
(ii) the aggregate amount allowed to the creditor— (I) as deductions under subsection (a) or (b) of section 166 (by reason of the worthlessness or partial worthlessness of the indebtedness), or (II) as an ordinary loss on the exchange,
shall be treated as an amount allowed as a deduction for depreciation, and
(iii) an exchange of such stock qualifying under section 354(a), 355(a), or 356(a) shall be treated as an exchange to which section 1245(b)(3) applies.
The amount determined under clause (ii) shall be reduced by the amount (if any) included in the creditor’s gross income on the exchange.
(8)Indebtedness satisfied by corporate stock or partnership interest#
For purposes of determining income of a debtor from discharge of indebtedness, if—
(A) a debtor corporation transfers stock, or
(B) a debtor partnership transfers a capital or profits interest in such partnership,
to a creditor in satisfaction of its recourse or nonrecourse indebtedness, such corporation or partnership shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the stock or interest. In the case of any partnership, any discharge of indebtedness income recognized under this paragraph shall be included in the distributive shares of taxpayers which were the partners in the partnership immediately before such discharge.
(8)(A)#
a debtor corporation transfers stock, or
(8)(B)#
a debtor partnership transfers a capital or profits interest in such partnership,
(9)Discharge of indebtedness income not taken into account in determining whether entity meets REIT qualifications#
Any amount included in gross income by reason of the discharge of indebtedness shall not be taken into account for purposes of paragraphs (2) and (3) of section 856(c).
(10)Indebtedness satisfied by issuance of debt instrument#
(A) In general For purposes of determining income of a debtor from discharge of indebtedness, if a debtor issues a debt instrument in satisfaction of indebtedness, such debtor shall be treated as having satisfied the indebtedness with an amount of money equal to the issue price of such debt instrument.
(B) Issue price For purposes of subparagraph (A), the issue price of any debt instrument shall be determined under sections 1273 and 1274. For purposes of the preceding sentence, section 1273(b)(4) shall be applied by reducing the stated redemption price of any instrument by the portion of such stated redemption price which is treated as interest for purposes of this chapter.
(10)(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.
(10)(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.