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Partnership Division

Troubled Partnerships: Negotiating successful Debt Workouts and Other Issues

Hard economic times are upon us. Not since the early 1990's have we seen economic activity diminished to the extent that we are experiencing today. As is typical with economic downturns, debt workouts are on the rise. Many of these workouts involve entities that are treated, for federal income tax purposes, as partnerships. Unlike previous downturns, the partnerships that are restructuring (or liquidating) are not solely real estate partnerships. Many diverse types of business are now being conducted through partnerships. A significant number of these businesses are experiencing debt workouts in the partnership form for the first time.

Tax consequences of:

• When partnership property is transferred in satisfaction of debt versus keeping the property;
• Income recognition where liabilities are discharged including at-risk and passive loss rules;
• Allocation of income from discharge of indebtedness and recognition of income when partnership debt is forgiven;
• Circumstances when cancellation of indebtedness ("COD") income may be excluded and the tax impact of such exclusion;
• Recognizing a loss with respect to its investment in a troubled partnership; and
• The tax impact of bankruptcy filing.

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