102 STAT. 3386 PUBLIC LAW 100-647—NOV. 10,1988

shall include any Federal, State, or local government or
agency or instrumentality thereof.

"(2) QUALIFIED FARM INDEBTEDNESS.—For purposes of this sec-
tion, indebtedness of a taxpayer shall be treated as qualified
farm indebtedness if—

"(A) such indebtedness was incurred directly in connec-
tion with the operation by the taxpayer of the trade or
business of farming, and

"(B) 50 percent or more of the aggregate grross receipts of

the taxpayer for the 3 taxable years preceding the taxable

year in which the discharge of such indebtedness occurs is

attributable to the trade or business of farming.

"(3) AMOUNT EXCLUDED CANNOT EXCEED SUM OF TAX

ATTRIBUTES AND BUSINESS AND INVESTMENT ASSETS.—

"(A) IN GENERAL,—The amount excluded under subpara-
graph (C) of subsection (aXD shall not exceed the sum of—
"(i) the adjusted tax attributes of the taxpayer, and
"(ii) the aggregate adjusted bases of qualified prop-
erty held by the taxpayer as of the beginning of the
taxable year following the taxable year in which the
discharge occurs.

"(B) ADJUSTED TAX ATTRIBUTES.—For purposes of subpara-
graph (A), the term 'adjusted tax attributes' means the sum
of the tax attributes described in subparagraphs (A), (B), (C),
and (E) of subsection (bX2) determined by taking into ac-
count $3 for each $1 of the attributes described in subpara-
graphs (B) and (E) of subsection (bX2).

"(C) QUALIFIED PROPERTY.—For purposes of this para-
graph, the term 'qualified property' means any property
which is used or is held for use in a trade or business or for
the production of income.

"(D) COORDINATION WITH INSOLVENCY EXCLUSION.—For
purposes of this paragraph, the adjusted basis of any quali-
fied property and the amount of the adjusted tax attributes
shall be determined after any reduction under subsection
(b) by reason of amounts excluded from gross income under
subsection (aXIXB)."

(5) Paragraph (4) of section 1017(b) of the 1986 Code is
amended to read as follows:
"(4) SPECIAL RULES FOR QUALIFIED FARM INDEBTEDNESS.—

"(A) IN GENERAL.—Any amount which under subsection
(bX2XD) of section 108 is to be applied to reduce basis and
which is attributable to an amount excluded under subsec-
tion (aXIXC) of section 108—

"(i) shall be applied only to reduce the basis of quali-
fied property held by the taxpayer, and

"(ii) shall be applied to reduce the basis of qualified
property in the following order:

"(I) First the basis of qualified property which is
depreciable property.

'(II) Second the basis of qualified property which
is land used or held for use in the trade or business
of farming.

"(Ill) Then the basis of other qualified property.
"(B) QUALIFIED PROPERTY.—For purposes of this para-
graph, the term 'qualified property' has the meaning given
to such term by section 108(gX3XC).