Volume 5 Winter 2011 Number 2 - Charleston Law Review

2011] Tax Aspects—Financially Troubled Entitiesif partners owning in the aggregate 85% of the capital and profitsinterests of the partnership make an election to excludecancellation of indebtedness income, the partnership is requiredto make the required reductions in those partners’ shares ofinside bases. A consenting partnership statement must beincluded with the filing of the partnership return for the taxableyear following the year that ends with or within the taxable yearthe taxpayer excludes the cancellation of indebtedness income. 172A partner’s proportionate share of the partnership’s basis indepreciable real property is equal to the sum of the partner’s §743(b) basis adjustments to items of depreciable real propertyand the common basis depreciation deductions that arereasonably expected to be allocated to the partner over theproperty’s remaining useful life. 173 The assumptions made by thepartnership in determining the reasonably expected allocation ofdepreciation deductions must be consistent for each partner. 174D. Conversion of Distressed Partnership to a C CorporationPresumably, consideration will be given to a conversion of thedistressed partnership to a corporation in order to trap income atthe corporate level or to take advantage of the exemption rulesunder § 108 for bankruptcy or insolvency. The conversioncould take the form of three basic fact patterns. 175 In the firstsituation, the partnership would contribute its assets to a newcorporation in exchange for stock and the assumption of theliabilities of the corporation. 176 The stock of the new corporationwould then be distributed to the partners. The second techniqueinvolves liquidation by the partnership of its assets andliabilities, followed by a contribution of assets and liabilities to anew corporation in exchange for the corporation’s stock. 177 Thethird situation is one in which the partners transfer theirpartnership interests to a new corporation in exchange for the172. § 1.1017-1(g)(2)(iii)(A).173. § 1.1017-1(g)(iv)(A)(1).174. § 1.1017-(g)(2)(iv)(A).175. I.R.C. § 351 (2006).176. Id.177. Id.261