Daily Tax Update - October 30, 2008

THE DAILY TAX UPDATE WILL BE PUBLISHED ON A PERIODIC BASIS UNTIL CONGRESS RETURNS NOVEMBER 17^TH.

PROPOSED REGULATIONS ISSUED REGARDING PARTNERSHIP DEBT-FOR-EQUITY EXCHANGES:  Today, the IRS and Treasury issued proposed regulations relating to the application of sections 108(e)(8) and 721 to partnerships and their partners. Section 108(e)(8) provides, inter alia, that, for purposes of determining income of a debtor from discharge of indebtedness (COD income), if a debtor partnership transfers a capital or profits interest in such partnership to a creditor in satisfaction of such partnership’s indebtedness, such partnership shall be treated as having satisfied the indebtedness with an amount of money equal to the fair market value of such interest. 

• The proposed regulations permit the partnership and the creditor, if certain listed conditions are met, to treat the fair market value of the partnership interest transferred to the creditor as being equal to the liquidation value of such partnership interest. If the listed conditions are not satisfied, the proposed regulations provide that all facts and circumstances are to be considered in determining the fair market value of such partnership interest.
• The proposed regulations also provide that, with certain exceptions, the nonrecognition rule of section 721 applies to a creditor’s contribution of partnership indebtedness to the partnership in exchange for a partnership interest.
• The preamble to the proposed regulations also indicates that IRS and Treasury believe that (i) the creditor’s basis in such partnership interest should be increased by the adjusted basis of the contributed indebtedness (rather than having the creditor recognize a loss at the time of such exchange) and (ii) the creditor’s holding period for such partnership interest should include the creditor’s holding period for the contributed indebtedness.
• The regulations are proposed to apply to exchanges occurring on or after the date final regulations are published.
• For additional information, contact Aaron P. Nocjar - anocjar@steptoe.com
• The regulations can be accessed here. 

MISCELLANEOUS GUIDANCE ISSUED THIS WEEK:
Revenue Procedure 2008-64 (released October 29^th) Section 301 of the Emergency Economic Stabilization Act of 2008 treats as ordinary income or loss certain gain or loss from the sale or exchange by any applicable financial institution of applicable preferred stock in Fannie Mae or Freddie Mac. This revenue procedure provides guidance primarily for transactions in which the applicable financial institution is a partner in a partnership which held the applicable preferred stock.

PROPOSED RULES
Infrastructure Improvements (Under Section 897) here. 

[REG-130342-08; Filed: 10/30/08 at 8:45 am; Publication Date: 10/31/2008]

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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