Recognition of COD income realized on satisfaction of debt with partnership interest.

• Author: Schneider, Steven
• Position: Cancellation of debt

A corporation that transfers shares of its stock in satisfaction of its debt must recognize cancellation of debt (COD) income in the amount that would be realized if the debt were satisfied with money equal to the stock's fair market value (FMV). For a partnership that transfers a capital or profits interest in the partnership to a creditor in satisfaction of its debt, no Code provision expressly requires the partnership to realize COD income.

New Law

Under AJCA Section 896, when a partnership transfers a capital or profits interest in the partnership to a creditor in satisfaction of partnership debt, the partnership generally recognizes COD income in the amount that would be recognized if the debt were satisfied with money equal to the FMV of the partnership interest. The provision applies without regard to whether the cancelled debt is recourse or nonrecourse. Further, any COD income so recognized is allocated to the partners who held interests in the partnership immediately before satisfaction of the debt.

Effective Date

This provision is effective for CODs occurring after Oct. 21, 2004. Committee Reports indicate that no inference is intended as to the...