(a) General rule. (1) In addition to the adjustments provided in section 1016 and other applicable provisions of chapter 1 of the Code which adjustments are required to be made with respect to the cost or other basis of property, a further adjustment shall be made in the amount of the unrecognized gain under section 1071, if the taxpayer so elects. Such further adjustment shall be made only with respect to the cost or other basis of property which is of a character subject to the allowance for depreciation under section 167 (whether or not used in connection with a broadcasting business), and which remains in the hands of the taxpayer immediately after the sale or exchange in respect of which the election is made, or which is acquired by the taxpayer in the same taxable year in which such sale or exchange occurs. If the property is in the hands of the taxpayer immediately after the sale or exchange, the time of reduction of the basis is the date of the sale or exchange; in all other cases the time of reduction of the basis is the date of acquisition.
(2) The reduction of basis under section 1071 in the amount of the unrecognized gain shall be made in respect of the cost or other basis, as of the time prescribed, of all units of property of the specified character. The cost or other basis of each unit shall be decreased in an amount equal to such proportion of the unrecognized gain as the adjusted basis (for determining gain, determined without regard to this section) of such unit bears to the aggregate of such adjusted bases of all units of such property, but the amount of the decrease shall not be more than the amount of such adjusted basis. If in the application of such rule the adjusted basis of any unit is reduced to zero, the process shall be repeated to reduce the adjusted basis of the remaining units of property by the portion of the unrecognized gain which is not absorbed in the first application of the rule. For such purpose the adjusted basis of the remaining units shall be the adjusted basis for determining gain reduced by the amount of the adjustment previously made under this section. The process shall be repeated until the entire amount of the unrecognized gain has been absorbed.
(3) The application of the provisions of this section may be illustrated by the following example:
Using the facts given in the example set forth in § 1.1071-2(c), except that the taxpayer elects to reduce the basis of depreciable property in accordance with paragraph (a)(1)(iii) of § 1.1071-2, the computation may be illustrated as follows:
| Sale price of X Corporation stock | $100,000 |
| Basis for gain or loss | 75,000 |
| Realized gain (recognized except for the election under § 1.1071-1) | $25,000 |
| Adjusted basis of other depreciable property in hands of A immediately after sale: | |
| Building | 80,000 |
| Transmitter | 16,000 |
| Fixtures | 4,000 |
| Total | 100,000 |
| Computation of reduction: | |
| Building (80,000/100,000) × $25,000 (gain) | 20,000 |
| Transmitter (16,000/100,000) × $25,000 | 4,000 |
| Fixtures (4,000/100,000) × $25,000 | 1,000 |
| Total reduction | 25,000 |
| New basis of assets: | |
| Building ($80,000 minus $20,000) | 60,000 |
| Transmitter ($16,000 minus $4,000) | 12,000 |
| Fixtures ($4,000 minus $1,000) | 3,000 |
| Total adjusted basis after reduction under section 1071 | 75,000 |
| Realized gain upon sale of X Corporation stock | 25,000 |
| Less: Amount applied as a reduction to basis of depreciable property | 25,000 |
| Recognized gain for tax purposes | None |
(b) Special cases. With the consent of the Commissioner, the taxpayer may, however, have the basis of the various units of property of the class specified in section 1071 and this section adjusted in a manner different from the general rule set forth in paragraph (a) of this section. Variations from such general rule may, for example, involve adjusting the basis of only certain units of such property. The request for variations from such general rule should be filed by the taxpayer with his return for the taxable year in which he elects to have the basis of property reduced under section 1071. Agreement between the taxpayer and the Commissioner as to any variations from such general rule shall be effective only if incorporated in a closing agreement entered into under the provisions of section 7121.
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