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CLLA Update IRS At Odds with Tax Court Ruling on Partnership Debt Exclusion in Bankruptcy

Sharon Edmondson, Washington Legislative Team Member | February 13, 2015

IRS at Odds with Tax Court ruling on Partnership Debt Exclusion in Bankruptcy

In Action on Decision 2015-1, released Feb 5, the IRS said it disagreed with four Tax Court decisions from 2004, that interpreted tax code Section 108, regarding whether or not a general partner, who guaranteed some of the debts of a partnership, but who was not in bankruptcy in an individual capacity, may exclude a partnership debt canceled in a Title 11 bankruptcy case.

The Tax Court rulings in cases, Estate of Martinez v. Commissioner (T.C. Memo 2004-150), Gracia v. Commissioner (T.C. Memo 2004-147), Mirachi v. Commissioner (T.C. Memo 2004-148), and Price v. Commissioner (T.C. Memo 2004-149), held that the taxpayer could exclude the taxpayer’s share of cancellation of debt income under Section 108(a)(1)(A) discharged and released the partners from liability in a title 11 case because the partnership debt was discharged in bankruptcy.

The IRS disagreed with the Tax Court’s rulings as “inconsistent with the structure of Section 108 and underlying Congressional intent,” because the taxpayers in these cases were not under the jurisdiction of the bankruptcy court; the IRS pointed out that the partnerships, not the taxpayers, filed the petitions.


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