26 C.F.R. § 1.372-1 Corporations.
Title 26 - Internal Revenue
(a) If, as the result of a transaction described in section 371, so much of section 371(c) as relates to section 371(a), or the corresponding provisions of prior law, the property of an insolvent corporation is transferred, in pursuance of a plan of reorganization, to a corporation organized or made use of to effectuate such plan, the basis of such property in the hands of the acquiring corporation is the same as it would be in the hands of the insolvent corporation, increased in the amount of gain recognized upon such transfer under the law applicable to the year in which the transfer was made. In any such case, the adjustments to basis provided by section 270 of the Bankruptcy Act (11 U.S.C. 670), or section 1017 of the Code, shall not be made in respect of any indebtedness cancelled pursuant to the plan of reorganization under which the transfer was made. If the transaction falls within the provisions of section 372(a), the basis of the property involved shall be determined pursuant to such provisions, notwithstanding that the transaction might otherwise fall within another basis provision. (b) The provisions of section 372(a) are applicable in the determination of basis for all taxable years beginning after December 31, 1933, except that the basis so determined shall not be given effect in the determination of the tax liability for any taxable year beginning prior to January 1, 1943. With the exception indicated, the basis so prescribed is applicable from the date of acquisition of such property. For example, the provisions of section 1016 relating to adjusted basis shall be applied as if section 372(a) were a part of the Internal Revenue Code of 1939 and prior internal revenue laws applicable to all taxable years beginning after December 31, 1933. Hence, in determining the amount of the adjustments for depreciation, depletion, etc., under the provisions of section 1016(a)(2), the amount allowable is the amount computed with reference to the basis provided in section 372(a). (c) The effect of the application of section 372(a) may be illustrated by the following examples: Example (1). On January 1, 1935, the Y Corporation, a taxpayer making its returns on the calendar year basis, acquired depreciable property from the X Corporation as the result of a transaction described in section 372(a). On January 1, 1935, the property had, in the hands of the X Corporation, a basis of $200,000, an adjusted basis of $150,000, a fair market value as of January 1, 1935 of $80,000, and an estimated remaining life of 20 years. The 1935 transaction was treated as a taxable exchange and, accordingly, the Y Corporation claimed and was allowed depreciation in the amount of $4,000 for each of the eight taxable years 1935 through 1942, inclusive. For each of the twelve taxable years 1943 through 1954, inclusive, the Y Corporation claimed and was allowed depreciation in the amount of $7,500. On December 31, 1954, the property was sold for $10,000 cash. The amount of the gain realized upon the sale is computed as follows:
For the taxable year 1943 and succeeding taxable years, the Y Corporation is entitled to deductions for depreciation in respect of such property in the amounts of $7,500 in the determination of its tax liabilities for such years. But no change in the tax liability is authorized for preceding taxable years by reason of the difference between the $7,500 depreciation allowable and the $4,000 deduction previously allowed. Example (2). Assume the same facts as in Example (1), except that the property acquired by the Y Corporation had a fair market value as of January 1, 1935, of $180,000, instead of $80,000, and the Y Corporation claimed and was allowed depreciation in the amount of $9,000 for each of the eight taxable years 1935 to 1942, inclusive, and in the amount of $6,500 for the taxable years 1943 to 1954, inclusive. In such case, the amount of the gain realized upon the sale of the property would be computed as follows:
No change in the tax liability is authorized for taxable years preceding 1943 by reason of the difference between the $7,500 depreciation allowable and the $9,000 deduction previously allowed.
Title 26: Internal Revenue
PART 1—INCOME TAXES
Insolvency Reorganizations
§ 1.372-1 Corporations.
Basis to X Corporation..................................... $200,000Adjustment for depreciation in the hands of X 50,000 Corporation (sec. 1016)....................... -------------Adjusted basis for depreciation in the hands of 150,000 both X and Y Corporations (sec. 372(b)).......Deduct: Depreciation allowable in amount of $7,500 $60,000 per year (\1/20\ of $150,000) for 8 years, from Jan. 1, 1935, through Dec. 31, 1942.... Depreciation allowable Jan. 1, 1943, to Dec. 90,000 31, 1954 (12 years at $7,500)............... ------------ .......... 150,000 ------------Adjusted basis for computing gain or loss.................. 0Sale price..................................... 10,000 -------------Gain realized.............................................. 10,000
Adjusted basis for depreciation in the hands of Y $150,000 Corporation as computed in Example (1)....................Deduct: Depreciation allowed in the amount of $9,000 $72,000 per year for 8 years Jan. 1, 1935 to Dec. 31, 1942.................................... Depreciation allowable Jan. 1, 1943, to Dec. 78,000 31, 1954, inclusive (12 times $6,500)....... ------------ .......... 150,000Adjusted basis for computing gain or loss.................. 0Sale price..................................... $10,000 -------------Gain realized.................................. 10,000
