Treasury Regulations · 26 CFR
§ 1.61-12. Income from discharge of indebtedness.
Regulation text, no changes From the eCFR, current as of October 15, 2026. The eCFR is an authoritative but unofficial editorial compilation of the Code of Federal Regulations; the official text is the annual CFR on govinfo. Compare it with this section on ecfr.gov (external site) or the official annual CFR on govinfo (external site).
Regulation under 26 U.S.C. § 61
Cite as 26 CFR § 1.61-12
At a glance
Read from the text and its source citation. Not part of the regulation.
- Status
- In the current eCFR
- Issued
- November 26, 1960 by T.D. 6500
- Last amended
- December 31, 1997 by T.D. 8746
- Issued under
- 26 U.S.C. § 61
- Length
- 724 words · about 3 min to read
- Defines
- 1 term
- Cross-references
- cites 4 Code sections and 4 regulations; cited by 7
¶(a) In general. The discharge of indebtedness, in whole or in part, may result in the realization of income. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, the debtor realizes income in the amount of the debt as compensation for his services. A taxpayer may realize income by the payment or purchase of his obligations at less than their face value. In general, if a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation to the extent of the principal of the debt.
¶(b) Proceedings under Bankruptcy Act.
¶(1) Income is not realized by a taxpayer by virtue of the discharge, under section 14 of the Bankruptcy Act (11 U.S.C. 32), of his indebtedness as the result of an adjudication in bankruptcy, or by virtue of an agreement among his creditors not consummated under any provision of the Bankruptcy Act, if immediately thereafter the taxpayer's liabilities exceed the value of his assets. Furthermore, unless one of the principal purposes of seeking a confirmation under the Bankruptcy Act is the avoidance of income tax, income is not realized by a taxpayer in the case of a cancellation or reduction of his indebtedness under—
¶(i) A plan of corporate reorganization confirmed under Chapter X of the Bankruptcy Act (11 U.S.C., ch. 10);
¶(ii) An “arrangement” or a “real property arrangement” confirmed under Chapter XI or XII, respectively, of the Bankruptcy Act (11 U.S.C., ch. 11, 12); or
¶(iii) A “wage earner's plan” confirmed under Chapter XIII of the Bankruptcy Act (11 U.S.C., ch. 13).
¶(2) For adjustment of basis of certain property in the case of cancellation or reduction of indebtedness resulting from a proceeding under the Bankruptcy Act, see the regulations under section 1016.
¶(c) Issuance and repurchase of debt instruments—
¶(1) Issuance. An issuer does not realize gain or loss upon the issuance of a debt instrument. For rules relating to an issuer's interest deduction for a debt instrument issued with bond issuance premium, see § 1.163-13.
¶(2) Repurchase—
¶(i) In general. An issuer does not realize gain or loss upon the repurchase of a debt instrument. However, if a debt instrument provides for payments denominated in, or determined by reference to, a nonfunctional currency, an issuer may realize a currency gain or loss upon the repurchase of the instrument. See section 988 and the regulations thereunder. For purposes of this paragraph (c)(2), the term repurchase includes the retirement of a debt instrument, the conversion of a debt instrument into stock of the issuer, and the exchange (including an exchange under section 1001) of a newly issued debt instrument for an existing debt instrument.
¶(ii) Repurchase at a discount. An issuer realizes income from the discharge of indebtedness upon the repurchase of a debt instrument for an amount less than its adjusted issue price (within the meaning of § 1.1275-1(b)). The amount of discharge of indebtedness income is equal to the excess of the adjusted issue price over the repurchase price. See section 108 and the regulations thereunder for additional rules relating to income from discharge of indebtedness. For example, to determine the repurchase price of a debt instrument that is repurchased through the issuance of a new debt instrument, see section 108(e)(10).
¶(iii) Repurchase at a premium. An issuer may be entitled to a repurchase premium deduction upon the repurchase of a debt instrument for an amount greater than its adjusted issue price (within the meaning of § 1.1275-1(b)). See § 1.163-7(c) for the treatment of repurchase premium.
¶(iv) Effective date. This paragraph (c)(2) applies to debt instruments repurchased on or after March 2, 1998.
¶(d) Cross references. For exclusion from gross income of—
¶(e) Cross reference. For rules relating to the treatment of liabilities on the sale or other disposition of encumbered property, see § 1.1001-2.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6984, 33 FR 19174, Dec. 24, 1968; T.D. 7741, 45 FR 81745, Dec. 12, 1980; T.D. 8746, 62 FR 68175, Dec. 31, 1997]
Terms defined here
Where the text says “the term … means”. Select a term to jump to its definition.
Cross-references
Computed from the citations in the text of 26 CFR.
Code sections it cites
- § 988 Treatment of certain foreign currency transactions
- § 1001 Determination of amount of and recognition of gain or loss
- § 108 Income from discharge of indebtedness
- § 621 Repealed
Regulations it cites
- § 1.163-13 Treatment of bond issuance premium.
- § 1.1275-1 Definitions.
- § 1.163-7 Deduction for OID on certain debt instruments.
- § 1.1001-2 Discharge of liabilities.
Cited by 7 other regulations
- § 1.108(i)-3 Rules for the deduction of OID.
- § 1.381(c)(9)-1 Amortization of bond discount or premium.
- § 1.988-2 Recognition and computation of exchange gain or loss.
- § 1.1001-2 Discharge of liabilities.
- § 1.1441-2 Amounts subject to withholding.
- § 1.1502-13 Intercompany transactions.
- § 15a.453-1 Installment method reporting for sales of real property and casual sales of personal property.
Amendment history
From the source citation at the end of the section, newest first. T.D. is a Treasury decision; FR is the Federal Register.
- Amended by T.D. 8746 (62 FR 68175)
- Amended by T.D. 7741 (45 FR 81745)
- Amended by T.D. 6984 (33 FR 19174)
- Issued by T.D. 6500 (25 FR 11402)
Where it sits in 26 CFR
- Subchapter A Income tax
- Part 1 Income taxes
- Definition of Gross Income, Adjusted Gross Income, and Taxable Income
Nearby sections
- § 1.61-8 Rents and royalties.
- § 1.61-9 Dividends.
- § 1.61-10 Alimony and separate maintenance payments; annuities; income from life insurance and endowment contracts.
- § 1.61-11 Pensions.
- § 1.61-12 Income from discharge of indebtedness.
- § 1.61-13 Distributive share of partnership gross income; income in respect of a decedent; income from an interest in an estate or trust.
- § 1.61-14 Miscellaneous items of gross income.
- § 1.61-15 Options received as payment of income.
- § 1.61-21 Taxation of fringe benefits.