Volume 5 Winter 2011 Number 2 - Charleston Law Review

CHARLESTON LAW REVIEW [Volume 5interest, such partner will recognize gain on the transaction. 139The gain will then be added to the partner’s basis in hispartnership interest. 140Although C has increased his basis in his partnershipinterest to reflect the “recourse” nature of the debt, C still facesthe issue of a potential income hit in the event that the principalof the debt is decreased in a debt modification. However, at thisstage of events, C is able to shelter himself from any income hit.V. EXCLUSIONS OF CANCELLATION OF INDEBTEDNESSINCOME UNDER § 108Section 108 provides for a detailed list of rules, which caneliminate or mitigate taxability of cancellation of indebtednessincome. 141 The first set of rules pertains to bankruptcy andinsolvency. In this regard, cancellation of indebtedness income isnot included in gross income if the discharge occurs in a Title 11case. 142 A Title 11 case is a “case under title 11 of the[Bankruptcy Code] but only if the taxpayer is under thejurisdiction of the court in such case, and the discharge ofindebtedness is granted by the court or is pursuant to a planapproved by the court.” 143 Section 108(a)(1)(B) provides thatcancellation of indebtedness income is not included in grossincome if the taxpayer is insolvent. 144 The term insolvent isdefined by the Code to mean the “excess of liabilities over the fairmarket value of assets.” 145The exclusions listed above will not be of real practical usebecause the bankruptcy and insolvency exclusions apply only atthe partner level—not the partnership level. 146 Since this Articleis concerned with the restructuring of partnerships and LLCs256139. I.R.C. § 731(a).140. I.R.C. § 705(a)(1)(A).141. I.R.C. § 108.142. I.R.C. § 108(a)(1)(A).143. I.R.C. § 108(d)(2).144. I.R.C. § 108(a)(1)(B).145. I.R.C. § 108(d)(3).146. I.R.C. § 108(d)(6).