Academic journal article Journal of Accountancy

Partnerships and Debt Relief

Academic journal article Journal of Accountancy

Partnerships and Debt Relief

Article excerpt

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). …

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