April 22, 2009

The Honorable Douglas H. Shulman

Commissioner of Internal Revenue

1111 Constitution Avenue, NW

Washington, DC 20044

The Honorable Michael F. Mundaca

Acting Assistant Treasury Secretary                      

 (Tax Policy)                                                     

1500 Pennsylvania Ave., NW, 3120 MT                  

Washington, DC 20220

Re: Comments on REG-164370-05, Relating to the Application of Section 108(e) to Partnerships and Their Partners

Dear Acting Assistant Secretary Mundaca and Commissioner Shulman:

The American Institute of Certified Public Accountants has reviewed the proposed regulations under section 108(e)(8) of the Internal Revenue Code which provide guidance with respect to the amount of discharge of indebtedness income recognized by a partnership on the transfer of a partnership interest to a creditor in satisfaction of debt, and the consequences to the creditor upon the receipt of the partnership interest. 

Our comments make several requests not the least of which is a request to reconsider the creditor’s ability to deduct a loss for the amount by which the creditor's tax basis in the receivable exceeds the value of the partnership equity received. While we recognize that Treasury and the IRS may have felt constrained by the language of the statute or by the necessity to conform partnership treatment with corporate treatment, we offer alternative approaches. 

Additional recommendations include: allowing the use of fair market value rather than liquidation value; clarifying in the minimum gain chargeback regulations that COD income is a first-tier item; applying the revaluation provisions in the proposed noncompensatory partnership option regulations to the debt-for equity exchange; and others. Requests for clarification include: the treatment of nonrecourse debt, including the application of the insolvency exception and section 7701(g); the treatment of an accrual basis creditor’s accrued interest income; the treatment of the debt-for-equity exchange under section 704(c); whether the "exchange" requirement of section 721 is satisfied when the partnership is insolvent; whether section 721 applies to the partnership when the exchanged debt is an unpaid rent or royalty obligation; and whether section 108(e)(7) applies to section 108(e)(8) transactions.

The AICPA appreciates the opportunity to comment on the proposed regulations. If you would like to discuss our comments, please contact Hughlene A. Burton, Chair of the Partnership Taxation Technical Resource Panel at haburton@uncc.edu; Gretchen G. Foley, primary contributor to these comments at gretchen.g.foley@us.pwc.com; or Marc A. Hyman, AICPA Technical Manager at mhyman@aicpa.org.

Sincerely,

Alan R. Einhorn

Chair, Tax Executive Committee

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