Volume 5 Winter 2011 Number 2 - Charleston Law Review

2011] Tax Aspects—Financially Troubled Entitiescan be invoked to satisfy other partners’ . . . capital accountbalances; (2) the requirements of the economic effect [tests are]are otherwise met; and (3) substantiality [is] independentlyestablished.” 122The typical partnership agreement does not provide for anunconditional restoration obligation. Rather, the typicalpartnership agreement simply provides for a qualified incomeoffset. Thus, in a fact pattern similar to that discussed above, anallocation of cancellation of indebtedness income based on anallocation pursuant to a profits interest would not have economiceffect.F. Partner’s Acquisition of Partnership Debt from LenderOne other situation that should be mentioned is where apartner acquires nonrecourse debt from the lender, but the debtis not extinguished. There are two fact patterns that are worthexploring. In the first situation, assume that A, B, and C arepartners in the ABC Partnership. A and B have a profits interestof 24% each and share losses in the same ratio. Partner C has a52% interest in profits and shares loss in the same ratio.Further, assume that the partnership has nonrecourse debt of$4,000, the property has a fair market value of $2,000, and C canacquire the nonrecourse debt for $1,500. Also, assume that thereis no independent restoration obligation in the partnershipagreement.The first point that should be noted is that if C acquires thenonrecourse debt from the lender, C will be considered a “relatedparty” for purposes of the related party rules. 123 In this type offact pattern, the acquisition of the debt instrument by the relatedparty from the lender results in the realization by the debtor ofcancellation of indebtedness income. 124 The standard fordetermining whether a party is “related” is set forth in §§ 267(b)and 707(b)(1). 125 C is related to the ABC Partnership because C122. Rev. Rul. 92-97, 1992-2 C.B. 124.123. I.R.C. § 108(e)(4).124. I.R.C. § 108(e)(4)(A).125. Id.253