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ARTICLE · 25 JUNE 2012

IRS Rules On Discharged Nonrecourse Debt From Partnership

Grant Thornton LLP
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The IRS has ruled in Rev. Rul. 2012-14 that, for purposes of measuring a partner’s insolvency, each partner treats a discharged nonrecourse debt of the partnership as a liability based on the allocation of income from discharge of indebtedness (COD income).

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Grant Thornton'S Washington National Tax Office
Grant Thornton'S Washington National Tax Office
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The IRS has ruled in Rev. Rul. 2012-14 that, for purposes of measuring a partner's insolvency, each partner treats a discharged nonrecourse debt of the partnership as a liability based on the allocation of income from discharge of indebtedness (COD income).

The revenue ruling describes a situation in which a nonpartnership investor (X) and a corporation (Holdco) are equal partners in a partnership (PRS). In Year 1, PRS borrowed $1 million from a bank in exchange for a note with a stated principal amount of $1 million (the Note). The Note bore interest at a market rate and was secured by real estate that initially had a value in excess of $1 million. The Note was a nonrecourse liability under Treas. Reg. Sec. 1.752-1(a)(2), and neither PRS nor X and Holdco were personally liable on the Note.

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