Volume 5 Winter 2011 Number 2 - Charleston Law Review

2011] Tax Aspects—Financially Troubled Entitiesmandates an adjustment for original issue discount accruingwith respect to a debt instrument that is issued in exchange forthe original debt instrument. 210An “applicable debt instrument” is defined as any debtinstrument not “issued by a C corporation or any other person inconnection with” carrying on a trade or business. 211 “Debtinstruments” include any “bond, debenture, note certificate, orany other instrument or contractual arrangement constitutingindebtedness . . . .” 212A “reacquisition” of a debt instrument is defined as an“acquisition” of a permissible debt instrument by: (a) the debtoror (b) a “related” party to the debtor, and the term “acquisition”includes: (i) an acquisition of a debt instrument for cash; (ii) theexchange of a debt instrument for another debt instrument(including an exchange relating from a debt modification); (iii)the exchange of a partnership interest for a debt instrument; (iv)the contribution of a debt instrument to the capital of the issuer;and (v) the complete forgiveness of a debt instrument by a holderof the debt obligation. 213The statutory exclusions for qualified real property businessindebtedness do not apply to the cancellation of a taxpayer thatmakes the § 108(i) election for the year in which the taxpayermakes the election or any subsequent year. 214 The taxpayermakes the § 108(i) election, which is irrevocable, by attaching astatement to the taxpayer’s return for the taxable year in whichthe reacquisition occurs. 215D. Ordinary Income/Capital Gains IssuesTo the extent that a partner will generate income, taxplanning should focus on ordinary income versus capital gain210. I.R.C. § 108(i)(2).211. I.R.C. § 108(i)(3)(A).212. I.R.C. § 108(i)(3)(B).213. I.R.C. § 108(i)(4).214. I.R.C. § 108 (i)(5)(C). A similar rationale applies to the statutoryexclusions for insolvency, bankruptcy and qualified farm indebtedness. Seegenerally I.R.C. § 108.215. I.R.C. § 108(i)(5)(B).267