Treatment of Excess Nonrecourse Partnership Debt and COD Income Under Section 108

May 30, 2012
The U.S. Internal Revenue Service has just issued guidance that may allow partners in partnerships whose debt is being cancelled or reduced to avoid or minimize tax on cancellation of debt income. Previous guidance left unsettled a crucial tax factor in determining whether a partner in such a situation could take advantage of the insolvency exception to recognition of COD income under section 108(d)(4) of the U.S. Internal Revenue Code of 1986, as amended. On May 25, 2012, the IRS issued Revenue Ruling 2012-14, which addresses that issue and allows a partner to take into account partnership non-recourse debt when calculating whether such partner is personally insolvent and thus eligible for exemption from recognizing COD income. This update highlights how application of these rules as revised can minimize or eliminate tax liability.