IRS disagrees with Tax Court on partners’ COD exclusion


The IRS will not acquiesce to Tax Court decisions allowing general partners who guaranteed the debt of their partnership and were not in bankruptcy in their individual capacity to exclude from gross income cancellation-of-debt (COD) income arising from a Title 11 bankruptcy proceeding of the partnership (Action on Decision 2015-001).

The cases are Estate of Martinez (T.C. Memo. 2004-150), Gracia (T.C. Memo. 2004-147), Mirarchi (T.C. Memo. 2004-148), and Price (T.C. Memo. 2004-149). In holding the plaintiffs could exclude their entire shares of a partnership’s COD income from gross income, the Tax Court, invoking the principle of judicial comity, found no reason to question the bankruptcy court’s assertion of jurisdiction over the partners individually for the purpose of discharging and releasing them from liability for claims arising from their status as general partners and their personal guaranty agreements.

However, in the action on decision, the IRS pointed to the legislative history of Sec. 108(a)(1), which provides exclusion of COD income for reasons including discharge in a Title 11 case and insolvency. The IRS averred that the exclusion applies only to the bankrupt or insolvent partners and not to all the partners of a bankrupt partnership.

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