IRS CLARIFIES SCOPE OF FUTURE REGS ON DEBT DISCHARGE INCOME.

Notice 91-15

On March 22, 1991, a notice of proposed rulemaking containing a proposed regulation under section 108(e)(4) was published in the Federal Register (56 Fed. Reg. 12135, 1991-16 I.R.B. 9). The preamble to proposed section 1.108-2 stated that the Treasury Department intends to issue regulations to prevent the elimination of income on the extinguishment of indebtedness in certain nonrecognition transactions in which a debtor acquires its indebtedness from a creditor (or a creditor assumes the debtor's indebtedness to the creditor). The preamble also stated that these regulations will be effective for any transaction on or after March 21, 1991.

This notice clarifies that the March 21, 1991, effective date was intended to apply to nonrecognition transactions on or after March 21, 1991, only if (i) the creditor (or its predecessor) acquired the indebtedness or became related to the debtor in a transaction that occurred prior to the nonrecognition transaction and that would have been a direct or indirect acquisition under proposed section 1.108-2 if such prior transaction had occurred on or after March 21, 1991, and (ii) the debtor did not report discharge of indebtedness income as a result of the creditor's (or predecessor's) acquisition of the indebtedness or becoming related to the debtor.

Except to the extent described above, the preamble to proposed section 1.108-2 and this notice do not affect the treatment of transactions in which debtor and creditor interests are combined. Until further guidance is issued, such transactions will be treated in accordance with current law. Thus, in general, the transfer of partnership debt to a partnership in exchange for a partnership interest is not within the scope of the preamble.

FURTHER INFORMATION

For further information regarding this notice, contact Victor L. Penico (CC:CORP) at (202)566-3618 (not a toll-free call).