In a new Action on Decision (AOD 2015-10), the IRS stated that it will not follow the Tax Court’s 2004 Martinez decision, which had allowed a general partner to exclude cancellation of debt (COD) income from a partnership in bankruptcy. Mr. Martinez was a general partner who guaranteed the partnership’s debt, and the bankruptcy court entered a court order approving a contribution by Mr. Martinez to partially fund the partnership’s liabilities. The Tax Court Memorandum decision relied on the Section 108 bankruptcy exclusion for not imposing tax on the partner’s COD income. Although the statute applies the bankruptcy exclusion at the partner level, and the partner was not in personal bankruptcy, the court noted that the statutory text looked to whether the taxpayer was under the jurisdiction of the court that made the bankruptcy discharge. The court then held that Mr. Martinez was under such bankruptcy court jurisdiction since the bankruptcy court explicitly asserted its jurisdiction over Mr. Martinez through his status as a general partner and a guarantor on the partnership debt.
In its AOD, the IRS stated its litigation position that it will not follow the Tax Court Memorandum decision in this case as well as the related cases of Gracia, Mirarchi, and Price. The IRS’s position is that a partner must be under the jurisdiction of the bankruptcy court “as a debtor”, citing the structure of Section 108 as well as stating that the statutory intent is to give relief only to partners who are debtors in bankruptcy in their individual capacities and need a “fresh start.”
