Partnership COD Income and Other Debt Issues
Emory University School of Law
February 15, 2010
Tax Notes, Vol. 126, No. 845, 2010
Emory Law and Economics Research Paper No. 10-72
Emory Public Law Research Paper No. 10-113
The law of cancellation of indebtedness has changed recently in ways good and bad. Homeowners facing foreclosure have been provided tax relief, as have corporations and others unable to pay their business loans. Creditors of partnerships, however, have learned that their bad-debt deduction must be deferred if their loan is converted into an equity interest. This Article places the changes to partnerships and their creditors in context by providing an overview of the general rules applicable to cancellation of debt transactions and focusing on the application of those rules to partnerships, as well as on how the recent changes affect partnerships and their creditors. Even for partnerships able to pay their debts, leveraged transactions create special problems, and these are discussed in parts III-V. Part III looks at the effect of entity-level borrowing on partnership allocations and shows that in many circumstances, the acquisition of debt will not increase the amount of loss that can be allocated to any particular partner. Part IV briefly looks at the at-risk and passive loss limitations as they affect leveraged partnerships. Part V examines the rules applicable to the disposition of an interest in a leveraged partnership and concludes that regarding a partial disposition, the law is different than it first appears. This paper has been revised to reflect the temporary regulations promulgated on August 13, 2010, under section 108(i).
Number of Pages in PDF File: 34
Keywords: taxation, partnerships, indebtedness, federal taxation
JEL Classification: K34Accepted Paper Series
Date posted: August 3, 2010 ; Last revised: June 12, 2012
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