This column continues the discussion1 of the tax consequences of restructuring a troubled loan secured by real estate, where the owner is a partnership, with a review of a recent Internal Revenue Service (IRS) revenue ruling2 which addresses guidance on cancellation of indebtedness (COD) income in the partnership context.
Section 108 and COD Income
A partial reduction or complete forgiveness of a partnership debt will result in the partnership recognizing COD income in an amount equal to the difference between the excess, if any, of the adjusted issue price of extinguished debt over the issue price of the modified debt obligation accepted by the lender. This is true irrespective of whether the debt is a recourse or nonrecourse obligation of the partnership.3
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