On November 17, 2011 the IRS issued final Treasury Regulations (the “Final Regulations”) that address the tax consequences of a debtor partnership’s issuance of equity in satisfaction of a debt obligation (a “Partnership Equity-for-Debt Exchange”). The Final Regulations provide debtor partnerships, their partners and creditors with welcome clarity regarding the federal income tax consequences of such restructuring.

Section 108 of the Internal Revenue Code of 1986, as amended (the “Code”) provides that, when a partnership issues equity in satisfaction of its debt, such partnership shall be treated as satisfying such debt for an amount of money equal to the fair market value of such equity interest. The partnership recognizes cancellation of indebtedness income (“CODI”) equal to the excess, if any, of the amount of the debt obligation satisfied over the fair market value of such equity interest, which is allocated to the partners in the partnership immediately before the exchange. The Final Regulations address both the means for determining the fair market value of the partnership equity issued as well as the consequences of such exchange to the holders of the partnership debt receiving equity.