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Abstract: 

In November 2011, Treasury issued final regulations governing the federal income tax treatment of a transaction in which a partnership issues a partnership interest to a creditor in satisfaction of the partnership’s recourse or nonrecourse indebtedness to the creditor. The final regulations largely follow the approach taken in the proposed regulations on this subject issued in 2008 and are, at first blush, unfavorable to creditors—but, with proper tax planning, they do open up some avenues a creditor can take to recognize tax deductions and losses that are consistent with the creditor’s economic loss. This article examines the regulations, with a particular focus on how they impact lenders.

Keywords: debt-for-equity transaction; partnership tax; COD income; bad debt; Treas. Reg. Sec. 1.108-8; ; Treas. Reg. Sec.1.704-2; Treas. Reg. Sec. 1.721-1

Affiliations:  1: McDermott Will & Emery LLP; 2: McDermott Will & Emery LLP.