Regs. issued on transfers of partnership interest to satisfy partnership debt.

• Author: Nevius, Alistair M.

The IRS on November 15 issued final regulations on the application of Sec. 108(e) (8) to partners and partnerships (ID. 9557). The regulations provide rules for determining a partnership's discharge of indebtedness (DOI) income when it transfers a partnership interest to a creditor to satisfy a partnership debt.

The regulations also discuss how Sec. 721 applies when a partnership's debt is contributed to the partnership in exchange for a capital profits interest in the partnership. The regulations also cover how partnership DOI income is allocated as a minimum gain chargeback under Sec. 704.

The American Jobs Creation Act of 2004, P.L. 108-357, expanded the scope of Sec. 108(e)(8) to include partnership discharges of indebtedness. Under Sec. 108(e) (8), if a debtor partnership transfers a capital or profits interest in the partnership to a creditor in satisfaction of its debt (recourse or nonrecourse), the partnership is treated as having satisfied the debt with an amount of money equal to the fair market value (FMV) of the partnership interest. If the debt exceeds the FMV of the transferred interest, the...