When debt held by a partnership is canceled, the debt is classified as income for a partnership. The income from cancellation of debt is taxable unless certain exclusions are met.
Distribution of Cancellation of Debt
According to "Joint Ventures Involving Tax-Exempt Organizations" by Michael Sanders, the income from debt cancellation is distributed to partners according to their distributive shares in the partnership. If two individuals own equal shares of a partnership, each partner will receive half the canceled debt as income.
Exclusions
There are limited exclusions when the cancellation of debt is not classified as income to a partnership. When debt cancellation occurs during bankruptcy or insolvency of the business, the canceled debt is not treated as income. The book "J.K. Lasser's Your Income Tax Professional Edition 2009" states that canceled real estate debt that reduces the price to be paid for property is not classified as income but as a price adjustment.
When One Partner has Canceled Debt
According to "Ginsberg & Martin on Bankruptcy," if one partner tries to escape taxation on the debt by declaring bankruptcy, that partner must be classified as insolvent to avoid paying income tax on the canceled debt. If the remaining partnership members are solvent, the canceled debt may be classified as taxable income to the remaining partners.
0 comments:
Post a Comment