work days in the period of absence for which an exclusion is allowable in order to determine the total allowable exclusion. These rules may be illustrated by the following examples:

Example (1). Employee A is a salesman receiving salary and commissions on a weekly basis. His employer maintains a noncontributory wage continuation plan which provides for the continuation of A's basic salary of $80 per week during periods of absence. A was absent from work on account of sickness from Monday, February 8, 1964, through Sunday, March 15, 1964, but was not hospitalized. His normal work week is from Monday through Friday. The weekly amount of benefits paid to A ($80) does not exceed 75 percent of his "regular weekly rate of wages" as defined in paragraph (e) (5) of this section. Under section 105(d), the daily rate of exclusion for amounts attributable to the first 30 calendar days in the period of absence, excluding the first 7 days thereof (Monday, February 10, 1964, through Tuesday, March 3, 1964, inclusive) is limited to $15 ($75, maximum weekly rate of exclusion divided by 5 (number of normal work days in week)). The daily rate of exclusion for amounts attributable to the period of absence in excess of 30 calendar days (Wednesday, March 4, 1964, through Sunday, March 15, 1964, inclusive) is limited to $16 ($80, weekly rate of benefits divided by 5). Thus, the total exclusion permitted to employee A by section 105(d) is $383.00 ($15 x 17 work days ($255) + $16 x 8 work days ($128)).

Example (2). Assume the facts in example (1) except that A is paid benefits at the rate of $500 a month during periods of absence. The weekly rate of the benefits

Period of absence

computed under the rules stated in paragraph (e) (6) (ii) of this section is $115.38, which amount does not exceed 75 percent of his "regular weekly rate of wages" as defined in paragraph (e) (5) of this section. Under section 105(d), the daily rate of exclusion for amounts attributable to the first 30 calendar days in the period of absence, excluding the first 7 days thereof (Monday, February 10, 1964, through Tuesday, March 3, 1964, inclusive) is limited to $15 ($75, maximum weekly rate of exclusion divided by 5). The daily rate of exclusion for amounts attributable to the period of absence in excess of 30 calendar days (Wednesday, March 4, 1964, through Sunday, March 15, 1964, inclusive) is limited to $20 ($100, maximum weekly rate of exclusion divided by 5). Thus, the total exclusion permitted to employee A by section 105 (d) is $415.00 ($15 x 17 work days ($255) + $20 x 8 work days ($160)).

Example (3). Employee B, an office worker works five days during each week (Monday through Friday) and receives a salary of $85 per week. His employer maintains a noncontributory wage continuation plan which provides for no benefits during the first three days of absence, the continuation of full salary for one week thereafter and benefits at the rate of $65 per week thereafter. B was absent from work on account of sickness from Monday, March 16, 1964, through Tuesday, March 31, 1964, and was hospitalized from Wednesday, March 18, through Tuesday, March 24. B received total benefits of $137 for the period of absence, which does not exceed 75 percent of his "regular weekly rate of wages" as determined under paragraph (e) (5) of this section. B is permitted an exclusion under section of $127 calculated as follows:

105(d)

Mar. 16-18.

Mar. 19-25..

Mar. 26-31..

Total exclusion.

(g) Definitions. The term “personal injury" as used in this section, means an externally caused sudden hurt or damage to the body brought about by an identifiable event. The term "sickness" as used in this section, means mental illnesses and all bodily infirmities and disorders other than "personal injuries". Diseases, whether resulting from the occupation or otherwise, are not considered personal injuries, but they are treated as a sickness.

[T.D. 6500, 25 F.R. 11402, Nov. 6, 1960, as amended by T.D. 6770, 29 F.R. 15366, Nov. 17, 1964, T.D. 6888, 31 F.R. 9204, July 6, 1966]

(a) In general. Sections 104(a) (3) and 105 (b), (c), and (d) exclude from gross income certain amounts received through accident or health insurance. Section 105(e) provides that for purposes of sections 104 and 105 amounts received through an accident or health plan for employees, and amounts received from a sickness and disability fund for employees maintained under the law of a State, a Territory, or the District of Columbia, shall be treated as amounts

received through accident or health insurance. In general, an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness. A plan may cover one or more employees, and there may be different plans for different employees or classes of employees. An accident or health plan may be either insured or noninsured, and it is not necessary that the plan be in writing or that the employee's rights to benefits under the plan be enforceable. However, if the employee's rights are not enforceable, an amount will be deemed to be received under a plan only if, on the date the employee became sick or injured, the employee was covered by a plan (or a program, policy, or custom having the effect of a plan) providing for the payment of amounts to the employee in the event of personal injuries or sickness, and notice or knowledge of such plan was reasonably available to the employee. It is immaterial who makes payment of the benefits provided by the plan. For example, payment may be made by the employer, a welfare fund, a State sickness or disability benefits fund, an association of employers or employees, or by an insurance company.

(b) Self-employed individuals. Under section 105(g), a self-employed individual is not treated as an employee for purposes of section 105. Therefore, for example, benefits paid under an accident or health plan as referred to in section 105(e) to or on behalf of an individual who is self-employed in the business with respect to which the plan is established will not be treated as received through accident and health insurance for purposes of sections 104(a) (3) and 105. [T.D. 6722, 29 F.R. 5071, Apr. 14, 1964]

§ 1.106

Statutory provisions; contributions by employer to accident and health plans.

SEC. 106. Contributions by employer to accident and health plans. Gross income does not include contributions by the employer to accident or health plans for compensation (through insurance or otherwise) to his employees for personal injuries or sickness. § 1.106-1 Contributions by employer to accident and health plans.

The gross income of an employee does not include contributions which his employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for

personal injuries or sickness incurred by him, his spouse, or his dependents, as defined in section 152. The employer may contribute to an accident or health plan either by paying the premium (or a portion of the premium) on a policy of accident or health insurance covering one or more of his employees, or by contributing to a separate trust or fund (including a fund referred to in section 105 (e)) which provides accident or health benefits directly or through insurance to one or more of his employees. However, if such insurance policy, trust, or fund provides other benefits in addition to accident or health benefits, section 106 applies only to the portion of the employer's contribution which is allocable to accident or health benefits. See paragraph (d) of § 1.104-1 and §§ 1.105–1 through 1.105-5, inclusive, for regulations relating to exclusion from an employee's gross income of amounts received through accident or health insurance and through accident or health plans.

§ 1.107 Statutory provisions; rental value of parsonages.

SEC. 107. Rental value of parsonages. In the case of a minister of the gospel, gross income does not include

(1) The rental value of a home furnished to him as part of his compensation; or

(2) The rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home.

§ 1.107-1 Rental value of parsonages.

(a) In the case of a minister of the gospel, gross income does not include (1) the rental value of a home, including utilities, furnished to him as a part of his compensation, or (2) the rental allowance paid to him as part of his compensation to the extent such allowance is used by him to rent or otherwise provide a home. In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel. In general, the rules provided in § 1.1402 (c)-5 will be applicable to such determination. Examples of specific services the performance of which will be considered duties of a minister for purposes of section 107 include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations

and their integral agencies, and the performance of teaching and administrative duties at theological seminaries. Also, the service performed by a qualified minister as an employee of the United States (other than as a chaplain in the Armed Forces, whose service is considered to be that of a commissioned officer in his capacity as such, and not as a minister in the exercise of his ministry), or a State, Territory, or possession of the United States, or a political subdivision of any of the foregoing, or the District of Columbia, is in the exercise of his ministry provided the service performed includes such services as are ordinarily the duties of a minister.

(b) For purposes of section 107, the term "home" means a dwelling place (including furnishings) and the appurtenances thereto, such as a garage. The term "rental allowance" means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken prior to January 1, 1958, by the employing church or other qualified organization, or if such amount is designated as rental allowance pursuant to official action taken in advance of such payment by the employing church or other qualified organization when paid after December 31, 1957. The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. The designation referred to in this paragraph is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.

(c) A rental allowance must be included in the minister's gross income in the taxable year in which it is received, to the extent that such allowance is not used by him during such taxable year to rent or otherwise provide a home. Circumstances under which a rental allowance will be deemed to have been used to rent or provide a home will include cases in which the allowance is expended (1) for rent of a home, (2) for purchase of a home, and (3) for expenses directly related to providing a home. Expenses for food and servants are not considered for this purpose to be directly related to providing a home. Where the minister

(A) By a corporation, or (B) By an individual in connection with property used in his trade or business, and

(2) Such taxpayer makes and files a consent to the regulations prescribed under section 1017 (relating to adjustment of basis) then in effect at such time and in such manner as the Secretary or his delegate by regulations prescribes.

In such case, the amount of any income of such taxpayer attributable to any unamortized premium (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be included in gross income, and the amount of the deduction attributable to any unamortized discount (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be allowed as a deduction.

§ 1.108(a)-1 Income from discharge of indebtedness.

(a) (1) Section 108(a) provides a specific exclusion from gross income, at the taxpayer's election, of the amount of income attributable to the discharge of indebtedness, in whole or in part, within the taxable year. In order to take advantage of the exclusion, the taxpayer must file a consent to applicable regulations relating to the adjustment of basis, in accordance with § 1.108(a)-2. This section applies to indebtedness incurred or assumed either (i) by a corporation, or (ii) by an individual in connection with property used in his trade or business; and it covers any such indebtedness for which the corporate or individual taxpayer is liable or subject to which the taxpayer holds property.

(2) For purposes of section 108 (a) and this section, the determination as to whether an indebtedness is incurred or assumed by an individual in connection with property used in his trade or business depends upon the facts of each particular case. Where an indebtedness (whether secured or unsecured) is incurred or assumed by an individual and where the proceeds of such indebtedness are used to purchase, improve, or repair property used in the trade or business, section 108 (a) shall apply to the discharge of such indebtedness. However, an indebtedness of an individual will not be considered as incurred in connection with property used in his trade or business merely because it can be shown that the indebtedness was secured by property used in the trade or business.

(b) (1) If, as of the first day of the taxable year in which a discharge of indebtedness occurs, there is unamortized premium, the amount of the income attributable to such premium shall be excluded from gross income. For example: On January 1, 1955, the M Corporation (which files its return on a calendar year basis) had outstanding an issue of A bonds of the face value of $10,000, and as of that day there was $100 unamortized premium on this bond issue. On September 1, 1955, the M Corporation purchased these bonds for $9,000. The total amount to be excluded from gross income under this section is $1,100.

(2) If, as of the first day of the taxable year in which a discharge of indebtedness occurs, there is unamortized discount, the amount of the deduction attributable to such discount shall be disallowed as a deduction. For example: On January 1, 1955, the N Corporation (which files its return on a calendar year basis) had outstanding an issue of B bonds of the face value of $10,000, and as of that day there was $50 unamortized discount on this bond issue. On September 1, 1955, the N Corporation purchased these bonds for $9,000. The total amount to be excluded from gross income under this section is $950.

(c) Section 108 (a) and this section are inapplicable in the case of any discharge occurring in any proceeding under section 77B of the Bankruptcy Act (48 Stat. 912, repealed June 22, 1938), under Chapter X or XI of such act (11 U. S. C., ch. 10, 11), or under Chapter XV of such act (53 Stat. 1134, expired July 31, 1940) if the proceeding under such

Chapter XV was initiated by a petition filed on or before July 31, 1940, and with respect to any discharge of indebtedness to which section 108 (b) applies.

§ 1.108(a)-2 Making and filing of con

sent.

In order to take advantage of the exclusion from gross income provided by section 108 (a), a taxpayer must file with his return for the taxable year a consent to have the basis of his property adjusted in accordance with the regulations prescribed under section 1017 which are in effect at the time of filing such return. See §§ 1.1017-1 and 1.1017-2. In special cases, however, where the taxpayer establishes to the satisfaction of the Commissioner reasonable cause for failure to file the necessary consent with his original return, he may file the consent with an amended return or claim for credit or refund; and in such cases, the consent shall be to the regulations which, at the time of filing the consent, are applicable to the taxable year for which such consent is filed. In all cases the consent shall be made by or on behalf of the taxpayer on Form 982 in accordance with these regulations and the instructions on the form or issued therewith.

[T.D. 6928, 32 F.R. 13221, Sept. 19, 1967] § 1.108(b) Statutory provisions; income from discharge of indebtedness; railroad corporations.

SEC. 108. Income from discharge of indebtedness. ***

(b) Railroad corporations. No amount shall be included in gross income by reason of the discharge, cancellation, or modification, in whole or in part, within the taxable year, of any indebtedness of a railroad corporation, as defined in section 77 (m) of the Bankruptcy Act (11 U.S.C. 205 (m)). If such discharge, cancellation, or modification is effected pursuant to an order of a court(A) In a receivership proceeding, or

(B) In a proceeding under section 77 of the Bankruptcy Act,

commenced before January 1, 1960. In such cases, the amount of any income of the taxpayer attributable to any unamortized premium (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be included in gross income, and the amount of the deduction attributable to any unamortized discount (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be allowed as a deduction. Subsection (a) of this section

shall not apply with respect to any discharge of indebtedness to which this subsection applies.

[Sec. 108(b) as amended by sec. 5, Act of June 29, 1956 (Pub. Law 628, 84th Cong., 70 Stat. 403); sec. 1, Act of June 8, 1960 (Pub. Law 86-496, 74 Stat. 164)]

[T.D. 6528, 26 FR. 399, Jan. 19, 1961]

§ 1.108(b)-1

Income from discharge of indebtedness of railroad corporations.

(a) Under section 108(b), the amount of any income attributable to the discharge, cancellation, or modification, in whole or in part, within the taxable year, of any indebtedness of a railroad corporation as a result of an order of a court in a receivership proceeding, or in a railroad reorganization proceeding under section 77 of the Bankruptcy Act (11 U. S. C. 205) is excluded from the gross income of the railroad corporation. The section is applicable only in a case where income accrues to a taxpayer from the discharge, modification, or cancellation of the corporate indebtedness (whether in whole or in part) pursuant to a court order.

(b) The railroad corporations to which this section and section 108 (b) apply are those defined in section 77 (m) of the Bankruptcy Act (11 U. S. C. 205 (m)), namely, any common carrier by railroad engaged in the transportation of persons or property in interstate commerce, except a street, a suburban, or interurban electric railway which is not operated as a part of a general railroad system of transportation or which does not derive more than 50 percent of its operating revenues from the transportation of freight in standard steam railroad freight equipment.

(c) As used in section 108 (b) and this section, the term "indebtedness" means an obligation, absolute and not contingent, to pay on demand or within a given time, in cash or another medium, a fixed amount.

(d) If, as of the first day of the taxable year in which a discharge of indebtedness occurs, there is unamortized premium, the amount of the income attributable to such premium shall be excluded from gross income. If, as of the first day of the taxable year in which

(a)-1 for examples illustrating the application of this principle.

(e) The provisions of section 108(b) and this section are applicable with respect to any discharge occurring in a taxable year beginning before January 1, 1958, and for taxable years ending after December 31, 1959, the provisions are applicable with respect to any discharge occurring after December 31, 1959, pursuant to a court proceeding commenced before January 1, 1960.

[T.D. 6500, 25 F.R. 11402, Nov. 26, 1960, as amended by T.D. 6528, 26 F.R. 399, Jan. 19, 1961]

§ 1.109 Statutory provisions; improvements by lessee on lessor's property.

SEC. 109. Improvements by lessee on lessor's property. Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee.

§ 1.109-1

Exclusion from gross income of lessor of real property of value of improvements erected by lessee.

(a) Income derived by a lessor of real property upon the termination, through forfeiture or otherwise, of the lease of such property and attributable to buildings erected or other improvements made by the lessee upon the leased property is excluded from gross income. However, where the facts disclose that such buildings or improvements represent in whole or in part a liquidation in kind of lease rentals, the exclusion from gross income shall not apply to the extent that such buildings or improvements represent such liquidation. The exclusion applies only with respect to the income realized by the lessor upon the termination of the lease and has no application to income, if any, in the form of rent, which may be derived by a lessor during the period of the lease and attributable to buildings erected or other improvements made by the lessee. It has no application to income which may be realized by the lessor upon the termination of the lease but not attributable to the value of such buildings or improvements. Neither does it apply to income derived by the lessor subsequent to the termination of the lease incident to the ownership of such buildings or improvements.

(b) The provisions of this section may be illustrated by the following example: Example. The A Corporation leased in 1945 for a period of 50 years unimproved real