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Partnership Taxation in Bankruptcy

By Steven J. Joffe and Jerome M. Schwartzman
May 27, 2004

Most of the debtors involved in our restructuring work are corporations. On occasion, however, we find ourselves working on a matter involving a bankrupt partnership. Partnerships in bankruptcy raise a host of tax issues that differ from the issues we deal with in our typical corporate debtor work. In this article, we first discuss some basic elements of partnership taxation, and then review some of the tax issues unique to partnerships in bankruptcy.

Partnership Taxation in General

A partnership is not a tax-paying entity. Rather, it reports its income on an informational return, and this income flows through to its partners in accordance with the partnership agreement. The partners are liable for the tax on their allocable share of income from the partnership. Often, partnership agreements provide that cash may be distributed to the partners to enable them to pay the tax liability associated with their allocable share of partnership income.

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