Volume 5 Winter 2011 Number 2 - Charleston Law Review

2011] Tax Aspects—Financially Troubled Entities(taxable as partnerships), the basic assumption is that thepartners of the partnership or the members of the LLC are notbankrupt or insolvent.A. Purchase Price Adjustment Rule of § 108(e)(5)Section 108(e)(5) provides a special rule for a reduction toseller financing. 147 Such reduction in financing does not result incancellation of indebtedness income to the purchaser, and theprotection is not available if the purchaser is insolvent or inbankruptcy at the time of the reduction. 148 This rule is applied atthe partnership level, in contrast to the rules for bankruptcy andinsolvency. 149 Although this exclusion allows the debtor toreduce the basis in the property in contrast to recognizingcancellation of indebtedness income, the debt must be owed tothe original creditor, instead of a third-party creditor. 150 Thisresult is primarily based on the purchase price adjustmentexception created in Bowers v. Kerbaugh-Empire Co., a case thathas been discredited. 151A question arises as to whether the partners’ bases in theirpartnership interests should be increased by the allocation ofcancellation of indebtedness income. A denial of such an increasewould be based on the theory that a partnership level allocationdoes not result in an allocation of cancellation of indebtednessincome to the partners. In this connection, the Service hasapplied § 108(e)(5) at the partnership level without regard to theparties’ solvency. 152 A contrary position would argue that therelief in question is analogous to tax-free income under§ 705(a)(1)(B), where debt forgiveness of nonrecourse debt147. I.R.C. § 108(e)(5) (the seller of the property provided the financing andtook back a debt instrument).148. I.R.C. § 108(e).149. See I.R.S. Tech. Adv. Mem. 85-04-005 (Mar. 12, 1985); I.R.S. Priv. Ltr.Rul. 90-37-033 (Jun. 18, 1990); Rev. Rul. 92-92, 1992-2 C.B. 505.150. Rev. Rul. 92-99, 1992-2 C.B. 35; Preslar v. Comm’r., 167 F.3d 1323,1331 (10th Cir. 1999).151. Bowers v. Kerbaugh-Empire Co., 271 U.S. 170, 175 (1926). Kerbaugh-Empire has not been followed by subsequent decisions. E.g., Vukasovich, Inc. v.Comm’r, 790 F.2d 1409, 1414 (9th Cir. 1986).152. Tech. Adv. Mem., supra note 149.257