Final Regulations Issued on Partnership Debt Discharge

by

The Internal Revenue Service has issued final regulations under Internal Revenue Code Section 108(e)(8), governing situations where a partnership transfers a partnership interest to a creditor in exchange for discharge of the partnership’s debt. The regulations also discuss how Sec. 721 applies when a partnership’s debt is contributed to the partnership in exchange for a capital profits interest in the partnership. The final regulations adopt, with revisions, proposed regulations issued in 2008.

Under Internal Revenue Code Sec. 108(e)(8), if a debtor partnership transfers a capital or profits interest in the partnership to a creditor in satisfaction of its debt, the partnership is treated as having satisfied the debt with an amount of money equal to the fair market value of the partnership interest. If the debt satisfied is in excess of the fair market value of the transferred interest, the excess is income that must be passed through to those who were partners immediately before the debt discharge.

The regulations provide that liquidation value is to be used to determine the fair market value of a partnership interest.  However, this liquidation value can be used to determine the FMV of a partnership interest only if four conditions are met (Regs. Secs. 1.108-8(b)(2)(i)(A)–(D)). If the conditions are not satisfied, the fair market value of the transferred partnership interest is based on all the facts and circumstances.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: