IRS Issues Final Regulations On Treatment Of Partnership Debt For Equity Exchanges

On November 15, the Internal Revenue Service issued final Treasury Regulations (Regulations) under Section 108(e)(8) of the Internal Revenue Code regarding the determination of the cancellation of debt (COD) income to a partnership that transfers a partnership interest to a creditor in satisfaction of a partnership debt.

Pursuant to the American Jobs Creation Act of 2004, Public Law 108-357 (118 Stat. 1648), Section 108(e)(8) was amended to expand its scope to include cancellation of partnership indebtedness. Prior to the amendment, Section 108(e)(8) only applied to cancellation of corporate indebtedness. As amended, if a debtor partnership issues a capital or profits interest in the partnership in exchange for its debt (recourse or nonrecourse), the partnership is treated as having satisfied the debt with an amount of money equal to the fair market value (FMV) of the partnership interest issued to the creditor. The amount by which the discharged debt exceeds the