Perspectives on Discharge or Cancellation of Partnership Indebtedness: \u3ci\u3eStackhouse\u3c/i\u3e Revisited and Related Conceptual Problems

When indebtedness of a partnership is discharged or cancelled, difficult conceptual and mechanical problems arise under the Internal Revenue Code of 1954. This is due to an inadequately defined interrelationship between the income tax provisions of Subchapter K regarding partnerships and the general income rules of Subchapter B regarding discharge of indebtedness. These problems are further accentuated by the wavering federal income tax conception of a partnership as an entity for some purposes and as a mere aggregation of individuals for other purposes. A variety of factual circumstances may give rise to these problems, including the discharge of a partnership in bankruptcy, the cancellation of partnership indebtedness by a third party creditor, and the satisfaction of partnership obligations by payment at less than face value. Although these types of transactions appear to grant relief to partnerships and partners in general, unanticipated adverse tax consequences may befall partners in these circumstances. Although the statutory structure, judicial decisions, and established Internal Revenue Service position clearly fail to adequately define the tax consequences of these transactions, certain established positions appear to be nonetheless available to lend a degree of certainty to the area. However, any attempt to impose general discharge of indebtedness income notions into the partnership income tax context is fraught with pitfalls. This comment develops the present state of the law, analyzes the prevailing conceptual problems, and attempts to shed a small glimmer of light upon unresolved areas concerning the interrelationship of the partnership income tax provisions of Subchapter K and the general rules regarding discharge of indebtedness income