Under the Section 1082 basis adjustment, a corporation that deferred gain on an SEC-ordered restructuring must reduce the aggregate basis of the property it still holds by the full amount of gain realized but not recognized, allocate that reduction across seven ordered categories of property in proportion to each asset’s adjusted basis, and report the adjustment on Form 982, Part III. The provision was repealed in 2005, but it continues to govern transactions ordered under the Public Utility Holding Company Act of 1935 before that regulatory statute disappeared, so corporations still carrying assets from those pre-2005 orders remain bound by its mechanics.
When Section 1082 Still Applies
Sections 1081, 1082, and 1083 were repealed on December 21, 2005, by the Gulf Opportunity Zone Act, effective as if included in the Energy Policy Act of 2005.1Office of the Law Revision Counsel. 26 USC 1081 to 1083 Repealed The repeal is not retroactive. Any transaction ordered in compliance with PUHCA 1935 before that Act’s repeal remains governed by Sections 1081 through 1083 as though the repeal never occurred, and the Federal Energy Regulatory Commission confirmed that tax treatment under Section 1081 for such transactions “shall not be affected in any manner” by the repeal.2Federal Register. Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005
No new transaction can qualify. The rule is dormant except as to assets whose basis was reduced under a pre-2005 SEC order and whose eventual sale, depreciation, or depletion still runs against that reduced basis.
How Much Basis Must Be Reduced
Section 1082 never operates on its own. It engages only after a transaction qualifies for non-recognition under Section 1081, which required an exchange, sale, or distribution carried out in obedience to an SEC order directing the corporation to simplify its structure or comply with ownership limits under PUHCA 1935.1Office of the Law Revision Counsel. 26 USC 1081 to 1083 Repealed Voluntary restructurings that happened to coincide with a regulatory proceeding did not qualify.
When gain was realized on the mandated transaction but not recognized under Section 1081, the aggregate basis of the corporation’s retained property had to drop by an amount equal to the unrecognized gain.3Office of the Law Revision Counsel. 26 USC 1082 Basis for Determining Gain or Loss The deferred gain does not disappear. It sits inside the reduced basis of the retained assets and surfaces as a larger taxable gain whenever those assets are eventually sold.
Which Property Absorbs the Reduction
Treasury Regulation 1.1082-3 controls the allocation. The regulation establishes seven categories of property, and the reduction must be applied to those categories in the listed order: one category is exhausted before any of the reduction moves to the next.4eCFR. 26 CFR 1.1082-3 Reduction of Basis of Property by Reason of Gain Not Recognized Under Section 1081(b) The corporation cannot choose which assets to hit first.
Proportional Allocation Within a Category
Within any single category, each asset absorbs a share of the reduction proportional to its adjusted basis relative to the total adjusted basis of all property in that category.4eCFR. 26 CFR 1.1082-3 Reduction of Basis of Property by Reason of Gain Not Recognized Under Section 1081(b) If a category contains two assets with adjusted bases of $300,000 and $200,000, the first takes 60% of the reduction assigned to that category and the second takes 40%. When every asset in a category has been reduced to zero and unabsorbed gain remains, the same proportional method applies to the next category, and so on down the sequence.
Zero Floor and Excluded Property
No individual asset’s basis can be reduced below zero. Cash is excluded because it has no basis to reduce, and any asset whose adjusted basis for determining gain is already zero at the time the reduction takes effect is also excluded.4eCFR. 26 CFR 1.1082-3 Reduction of Basis of Property by Reason of Gain Not Recognized Under Section 1081(b)
Effect on Depreciation, Depletion, and Holding Period
The reduction is not confined to the calculation of gain or loss on sale. It equally reduces the basis used for depreciation and depletion, so a corporation that lowered the basis of depreciable equipment under Section 1082 must compute every subsequent depreciation deduction from the reduced figure.4eCFR. 26 CFR 1.1082-3 Reduction of Basis of Property by Reason of Gain Not Recognized Under Section 1081(b) The deferred gain therefore erodes ongoing deductions, not just the eventual sale calculation.
Holding periods carry over. Because the basis of the retained or received property is determined by reference to the property given up, Section 1223’s tacking rule applies, and the holding period of the exchanged property is added to that of the replacement property.5Office of the Law Revision Counsel. 26 US Code 1223 – Holding Period of Property Property received in an SEC-ordered exchange did not start a new holding clock.
Filing Form 982
The reporting vehicle is IRS Form 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).” Part III of the form covers the adjustment. By filing it, the corporation agrees to apply the general proportional rule set out in Treasury Regulation 1.1082-3(b).6Internal Revenue Service. Instructions for Form 982
A corporation that wants a different allocation must attach a separate request showing the alternative method and the resulting allocations. The IRS will not approve any alternative unless it is embodied in a formal closing agreement with the Commissioner under Section 7121; absent that agreement, the general rule applies regardless of what the corporation requested.6Internal Revenue Service. Instructions for Form 982
Form 982 goes in with the return for the year of the qualifying transaction. It becomes the permanent record linking the deferred gain to specific assets, so the corporation should retain the SEC order that mandated the transaction, the computation of realized but unrecognized gain, and a schedule showing each asset’s original and reduced basis.
Penalty Risk for Getting It Wrong
Overstating the basis of retained property understates the deferred gain, and any resulting underpayment on a future sale can trigger the accuracy-related penalty under Section 6662. The standard penalty is 20% of the underpayment attributable to negligence or a substantial understatement of income tax.7Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments A substantial understatement exists when the understatement exceeds the greater of 10% of the tax that should have been reported or $5,000.
Reporting basis at 150% or more of the correct amount is a substantial valuation misstatement carrying the same 20% penalty. If the misstatement is gross, generally 200% or more of the correct value, the penalty doubles to 40%.7Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments The adjustment from a pre-2005 SEC order may not surface as a tax issue for decades, until the asset is finally sold, which makes preserving the original Form 982, the underlying computations, and the seven-category allocation schedule the practical defense against these penalties.