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Partnerships and debt relief.

Cancellation of debt (COD) income can be excluded under Internal Revenue Code section 108 if the taxpayer is either bankrupt or insolvent. However, if the COD in* come is recognized within a bankrupt or insolvent partnership, it is treated as a pass-through item and any exclusion from income is made at the partner level.

An alternative rule allows the exclusion of COD income if received by the purchaser of property as a result of the seller's subsequent adjustment to the purchase debt. The basis of the property is reduced by the amount of the purchase price adjustment. This COD privilege is not available if the purchaser is either bankrupt or insolvent.

The Internal Revenue Service recently ruled a bankrupt or insolvent partnership may treat all or part of COD income as a purchase price adjustment if it arose from a cancellation of debt by the seller of the property (revenue procedure 92-92, IRB no. 1992-46, 11/16/92). The COD income now can be excluded as a basis adjustment to the property at the partnership level rather than becoming an income item to the partner for possible application of the bankruptcy or insolvency exception.

Observation: This new position enhances the flexibility of bankrupt or insolvent partnerships realizing COD in a purchase price adjustment from a seller. Without this rule, a solvent partner that is, a partner without bankruptcy or insolvency protection) would incur taxable income from pass-through COD income. This would be true even if the income arose in a purchase price adjustment.

Moreover, even if the individual partner is bankrupt or insolvent, any COD exclusion requires an offset to tax attribute carryovers. Under the new rule, the purchase price adjustment alternative at the partnership level will be more favorable in many cases, only requiring a reduction in the asset's basis.
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Article Details
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Title Annotation:cancellation of debt income
Author:Abrams, William
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Jan 1, 1993
Previous Article:Mitigation provisions apply only to income taxes.
Next Article:Identifying personal service corporations.

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