(48 Stat. 912), is consummated by adjustment of the capital or debt structure of such corporation without the transfer of its assets to another corporation, and a final judgment or decree in such proceeding has been entered before September 22, 1938, then the provisions of section 270 of the Bankruptcy Act, as amended (54 Stat. 709; 11 U. S. C. 670), shall not apply in respect of the property of such corporation. For the purposes of this section, the term "reorganization” shall not be limited by the definition of such term in section 112 (g) of the Internal Revenue Code of 1939.

§ 1.1018-1

Adjusted basis; exception to section 270 of the Bankruptcy Act, as amended.

The adjustment to basis provided by section 270 of the Bankruptcy Act, as amended (11 U.S.C. 670), and by §§ 1.1016-7 and 1.1016-8 shall not be made if, in a proceeding under section 77B of such Act, as amended (11 U. S. C.

207; 48 Stat. 912), indebtedness was canceled in pursuance of a plan of reorganization which was consummated by adjustment of the capital or debt structure of the insolvent corporation, and the final judgment or decree in such proceeding was entered before September 22, 1938. Section 1018 and this section do not apply if the plan of reorganization under such section 77B was consummated by the transfer of assets of the insolvent corporation to another corporation.

§ 1.1019 Statutory provisions; property on which lessee has made improve

ments.

SEC. 1019.

Property on which lessee has made improvements. Neither the basis nor the adjusted basis of any portion of real property shall, in the case of the lessor of such property, be increased or diminished on account of income derived by the lessor in respect of such property and excludable from gross income under section 109 (relating to improvements by lessee on lessor's property). If an amount representing any part of the value of the real property attributable to buildings erected or other improvements made by a lessee in respect of such property was included in gross income of the lessor for any taxable year beginning before January 1, 1942, the basis of each portion of such property shall be properly adjusted for the amount so included in gross income.

§ 1.1019-1 Property on which lessee has

made improvements.

In any case in which a lessee of real property has erected buildings or made other improvements upon the leased property and the lease is terminated by

For

forfeiture or otherwise resulting in the realization by such lessor of income which, were it not for the provisions of section 109, would be includible in gross income of the lessor, the amount so excluded from gross income shall not be taken into account in determining the basis or the adjusted basis of such property or any portion thereof in the hands of the lessor. If, however, in any taxable year beginning before January 1, 1942, there has been included in the gross income of the lessor an amount representing any part of the value of such property attributable to such buildings or improvements, the basis of each portion of such property shall be properly adjusted for the amount so included in gross income. example, A leased in 1930 to B for a period of 25 years unimproved real property and in accordance with the terms of the lease B erected a building on the property. It was estimated that upon expiration of the lease the building would have a depreciated value of $50,000, which value the lessor elected to report (beginning in 1931) as income over the term of the lease. This method of reporting was used until 1942. In 1952 B forfeits the lease. The amount of $22,000 reported as income by A during the years 1931 to 1941, inclusive, shall be added to the basis of the property represented by the improvements in the hands of A. If in such case A did not report during the period of the lease any income attributable to the value of the building erected by the lessee and the lease was forfeited in 1940 when the building was worth $75,000, such amount, having been included in gross income under the law applicable to that year, is added to the basis of the property represented by the improvements in the hands of A. As to treatment of such property for the purposes of capital gains and losses, see subchapter P (section 1201 and following), chapter 1 of the Code.

§ 1.1020 Statutory provisions; election in respect of depreciation, etc., allowed before 1952.

SEC. 1020. Election in respect of depreciation, etc., allowed before 1952. Any person may elect to have subparagraph (B) of section 1016 (a) (2) apply in respect of periods since February 28, 1913, and before January 1, 1952. Such an election shall be made in such manner as the Secretary or his delegate may by regulations prescribe and shall be

108 (a)) after the application of paragraph (a) (1) of this section shall be applied first against property of a character subject to the allowance for depreciation under section 167, property with respect to which a deduction for amortization is allowable under section 168 or 169, and property with respect to which a deduction for depletion is allowable under section 611 (but not including property specified in section 613), in the order in which such property is described in paragraph (a) (2) and (3) of this section. This section shall not be applicable to property with respect to which basis is reduced under paragraph (a) (5) and (6) of this section. Any further adjustment in basis required to be made under section 108 (a) shall be applied against other property in the order prescribed in paragraph (a) (2), (3), (4), (5), and (6) of this section.

(c) The application of paragraph (a) of this section may be illustrated by the following examples:

Example (1). On January 1, 1954, the N Corporation owned an office building, which it sold in March 1954. In June 1954 it purchased a factory building. In October 1954 the N Corporation bought in its outstanding bonds at less than their face value. Assuming that there is a proper exclusion from gross income under section 108 (a), the basis of each building shall be adjusted under section 1017 for the taxable year 1954. (But see § 1.1017-2.)

Example (2). The M Corporation had outstanding an issue of A bonds which it had sold at a premium and an issue of B bonds which it had sold at a discount. In July 1954 the M Corporation purchased such outstanding bonds for less than face value. The amount of income attributable to the discharge of the A bonds is $1,000 and the amount of unamortized premium (as of the first day of the taxable year in which the discharge occurred) is $200.

The amount

of income attributable to the discharge of the B bonds is $1,000 and the amount of unamortized discount (as of the first day of the taxable year in which the discharge occurred) is $50. Each issue of bonds is regarded as a separate indebtedness and the M Corporation may elect under section 108 (a) with respect to each issue or both issues. If the M Corporation elects under section 108 (a) to have excluded from gross income the amount of income attributable to the discharge of the issue of A bonds, the total reduction in basis of property of the M Corporation shall not exceed $1,200.

If the M Corporation elects with respect to the B bonds, the total reduction in basis shall not exceed $950. If the M Corporation elects with respect to both bond issues, the

$ 1.1018

§ 1.1017-2 indebtedness; (a) Section 1.1017-1 prescribes the general rule to be followed in adjusting where there is a proper exclusion from gross income under section 108(a).

basis of property

taxpayer

The may, however, have the basis of his property adjusted in a manner different from that

set forth in § 1.1017-1 upon a proper showing to the satisfaction of the Commissioner. Such adjustment, however, shall be consistent with the principles of § 1.1017-1. Variations from such general rule may, for example, involve adjusting the basis of only part of the taxpayer's property or adjusting the basis of all the taxpayer's property, according to a fixed allocation.

(b) A request for variations from the general rule prescribed in § 1.1017-1 shall be filed by the taxpayer with his return for the taxable year in which the discharge of indebtedness occurred unless a consent is permitted (under § 1.108 (a)-2) after the original return has been filed, in which case such request shall be filed with the amended return or claim for credit or refund, as the case may be. Agreement between the taxpayer and the Commissioner as to any variations from such general rule shall be effected only by a closing agreement entered into under the provisions of section 7121.

If no agreement is reached between the taxpayer and the Commissioner as to variations from the general rule prescribed in § 1.1017-1, then the consent filed on Form 982 shall be deemed to be a consent to the application of such general rule and such general rule shall prevail in the determination of the basis of the taxpayer's property. If no agreement is reached between the taxpayer and the Commissioner as to variations from the general rule and the taxpayer specifically states that he does not consent to the application of the general rule, then section 108 (a) and section 1017 shall not apply.

tion 108 (a) over the sum of the adjustments made under subparagraphs (1) and (2) of this paragraph shall next be applied to reduce the cost or other basis of all the property of the debtor (other than inventory and notes and accounts receivable) as follows: The cost or other basis of each unit of property shall be decreased in an amount equal to such proportion of such excess as the adjusted basis (without reference to this section) of each such unit of property bears to the sum of adjusted bases (without reference to this section) of all the property of the debtor other than inventory and notes and accounts receivable;

(4) Any excess of the total amount excluded from gross income under section 108 (a) over the sum of the adjustments made under subparagraphs (1), (2), and (3) of this paragraph shall next be applied to reduce the cost or other basis of inventory and notes and accounts receivable, as follows: The cost or other basis of inventory or notes or accounts receivable, as the case may be, shall be decreased in an amount equal to such proportion of such excess as the adjusted basis of inventory, notes receivable or accounts receivable, as the case may be, bears to the sum of the adjusted bases of such inventory and notes and accounts receivable;

(5) In the case of an individual, any excess of the total amount excluded from gross income under section 108 (a) over the sum of the adjustments made under subparagraphs (1), (2), (3), and (4) of this paragraph shall next be applied to reduce the cost or other basis of his property held for the production of income, as follows: The cost or other basis of each unit of such property shall be decreased in an amount equal to such proportion of such excess as the adjusted basis (without reference to this section) of each such unit of property bears to the sum of the adjusted bases (without reference to this section) of all of such property of the debtor; and

(6) In the case of an individual, any excess of the total amount excluded from gross income under section 108 (a) over the sum of the adjustments made under subparagraphs (1), (2), (3), (4), and (5) of this paragraph shall next be applied to reduce the cost or other basis of his property other than property used in any trade or business and property held for the production of income, as follows: The cost or other basis of each unit of such property shall be decreased in an amount

equal to such proportion of such excess as the adjusted basis (without reference to this section) of each such unit of property bears to the sum of the adjusted bases (without reference to this section) of all of such property of the debtor.

In the application of subparagraphs (1), (2), (3), (4), (5) and (6) of this paragraph, no decrease in the cost or other basis of any property shall exceed the amount of adjusted basis of such property without reference to this section. this section:

(b) For the purposes of

(1) Except where the context otherwise requires, property means all of the debtor's property, other than money;

(2) The phrase "indebtedness incurred to purchase" includes (i) indebtedness for money borrowed and applied in the purchase of property and (ii) an existing indebtedness secured by a lien against the property which the debtor, as purchaser of such property, has assumed to pay;

(3) The phrase "amount excluded from gross income under section 108 (a)" means the amount of income excluded under that section reduced by any deduction disallowed under that section for unamortized discount;

(4) Adjustments to basis shall be made:

(i) In the case of property owned on the first day of the taxable year, as of that day;

(ii) In the case of property acquired after the first day of the taxable year, as of the day so acquired—

regardless of the time such property was subsequently sold, exchanged, or otherwise disposed of by the taxpayer;

(5) Whenever a discharge of indebtedness is accomplished by a transfer of the taxpayer's property in kind, the difference between the amount of the obligation discharged and the fair market value of the property transferred is the amount which may be applied in reduction of basis;

(6) Regardless of the amount excluded by the taxpayer from his gross income under section 108 (a) and so stated on Form 982, the maximum amount by which basis may be reduced in respect of the discharge of any indebtedness is the amount of income resulting from the discharge of such indebtedness; and

(7) Any reduction in basis which remains to be taken (by reason of an exclusion from gross income under section

If the taxpayer and the Commissioner agree, the basis of the taxpayer's property may be adjusted in a manner different from that set forth in § 1.1016-7. Variations from such rule may, for example, involve adjusting the basis of any part of the taxpayer's property or adjusting the basis of all the taxpayer's property, according to a fixed allocation. Agreement between the taxpayer and the Commissioner as to any variation from such

general rule shall be effected only by a closing agreement entered into under the provisions of section 7121.

§ 1.1016-9

Adjusted basis; mutual savings banks, building and loan associations, and cooperative banks.

(a) The adjustments to the cost or other basis of property provided in section 1016 and §§ 1.1016-1 to 1.1016-8, inclusive, are applicable in the case of a

mutual savings bank not having capital stock represented by shares, a domestic building and loan association, and a cooperative bank without capital stock organized and operated for mutual purposes and without profit, although such institutions were exempt from tax for taxable years beginning before January 1, 1952. Proper adjustment must be made under section 1016 for the entire period since the acquisition of property. Thus, adjustment to basis must be made for depreciation sustained for all prior taxable years although such institution may have been exempt from tax during such years. Similarly, in the case of taxexempt and partially taxable bonds purchased at a premium and subject to amortization under section 171, proper adjustment to basis must be made to reflect amortization with respect to such premium from the date of acquisition of the bond (or in the case of bonds not issued with interest coupons, or in registered form, from the date such bonds are subject to amortization under section 171).

(b) The application cf paragraph (a) of this section may be illustrated by the following example:

Example. On January 1, 1954, Z, a mutual savings bank, which keeps its books on a calendar year basis, owns a tax-exempt $1,000 noncallable bond maturing on January 1,

1964. Such bond was acquired by Z on January 1, 1934, for $1,300. It was sold by Z on December 31, 1954, for $1,250. The yearly rate of amortization of the premium, determined by dividing the total premium of $300 by the life of the bond (30 years) is $10. Z realizes a gain of $80 from such sale computed as

The basis of a fully taxable bond purchased at a premium shall be adjusted from the date to which the election applies to amortize such premium in accordance with the provisions of section 171, except that no adjustment shall be allowable for such portion of the premium attributable to the period prior to the election.

(c) In the case of a mortgage (not within the definition of section 171 (d)) purchased, acquired, or originated at a premium, where the principal of such mortgage is payable in installments, adjustments to the basis of the premium must be made for all taxable years (whether or not the institution was exempt from tax during such years) in which installment payments are received. Such adjustments may be made on an individual mortgage basis or on a composite basis by reference to the average period of payments of the mortgage loans of such institution. For the purpose of this adjustment, the term "premium" includes the excess of the acquisition value of the mortgage over its maturity value. The acquisition value of the mortgage is the cost including buying commissions, attorneys' fees, or brokerage fees, but such value does not include amounts paid for accrued interest. For the method of amortization in the case of corporate mortgages purchased, acquired, or originated at a premium, see paragraph (e) of § 1.171-2.