(2) Limitation in title 11 case or insolvency In the case of a discharge to which subparagraph (A) or (B) of section
108 (a)(1) applies, the reduction in basis under subsection (a) of this section shall not exceed the excess of
(A) the aggregate of the bases of the property held by the taxpayer immediately after the discharge, over
(B) the aggregate of the liabilities of the taxpayer immediately after the discharge.
The preceding sentence shall not apply to any reduction in basis by reason of an election under section 108 (b)(5).
(3) Certain reductions may only be made in the basis of depreciable property
(A) In general
Any amount which under subsection (b)(5) or (c)(1) of section 108 is to be applied to reduce basis shall be applied only to reduce the basis of depreciable property held by the taxpayer.
(B) Depreciable property
For purposes of this section, the term depreciable property means any property of a character subject to the allowance for depreciation, but only if a basis reduction under subsection (a) will reduce the amount of depreciation or amortization which otherwise would be allowable for the period immediately following such reduction.
(C) Special rule for partnership interests
For purposes of this section, any interest of a partner in a partnership shall be treated as depreciable property to the extent of such partners proportionate interest in the depreciable property held by such partnership. The preceding sentence shall apply only if there is a corresponding reduction in the partnerships basis in depreciable property with respect to such partner.
(D) Special rule in case of affiliated group For purposes of this section, if
(i) a corporation holds stock in another corporation (hereinafter in this subparagraph referred to as the subsidiary), and
(ii) such corporations are members of the same affiliated group which file a consolidated return under section
1501 for the taxable year in which the discharge occurs,
then such stock shall be treated as depreciable property to the extent that such subsidiary consents to a corresponding reduction in the basis of its depreciable property.
(E) Election to treat certain inventory as depreciable property
(i) In general At the election of the taxpayer, for purposes of this section, the term depreciable property includes any real property which is described in section
1221 (a)(1).
(ii) Election An election under clause (i) shall be made on the taxpayers return for the taxable year in which the discharge occurs or at such other time as may be permitted in regulations prescribed by the Secretary. Such an election, once made, may be revoked only with the consent of the Secretary.
(F) Special rules for qualified real property business indebtedness In the case of any amount which under section
108 (c)(1) is to be applied to reduce basis
(i) depreciable property shall only include depreciable real property for purposes of subparagraphs (A) and (C),
(ii) subparagraph (E) shall not apply, and
(iii) in the case of property taken into account under section
108 (c)(2)(B), the reduction with respect to such property shall be made as of the time immediately before disposition if earlier than the time under subsection (a).
(4) Special rules for qualified farm indebtedness
(A) In general Any amount which under subsection (b)(2)(E) of section 108 is to be applied to reduce basis and which is attributable to an amount excluded under subsection (a)(1)(C) of section 108
(i) shall be applied only to reduce the basis of qualified property held by the taxpayer, and
(ii) shall be applied to reduce the basis of qualified property in the following order:
(I) First the basis of qualified property which is depreciable property.
(II) Second the basis of qualified property which is land used or held for use in the trade or business of farming.
(III) Then the basis of other qualified property.
(B) Qualified property For purposes of this paragraph, the term qualified property has the meaning given to such term by section
108 (g)(3)(C).
(C) Certain rules made applicable Rules similar to the rules of subparagraphs (C), (D), and (E) of paragraph (3) shall apply for purposes of this paragraph and section
108 (g).