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IRS Rules Foreign Debt Discharge Excluded From Income if Recognized Under Chapter 15

In a private letter ruling obtained by Kirkland & Ellis LLP that is expected to be made public in February, the Internal Revenue Service has ruled for the first time that a debtor need not recognize as taxable income any cancellation of indebtedness income (“CODI”) realized on debt cancelled via a non-U.S. bankruptcy proceeding. Under the facts of this ruling, a foreign taxpayer with U.S. operations realized CODI that could have been taxable in the United States. The debt was cancelled in a foreign bankruptcy proceeding, and that cancellation was then recognized in the United States by a proceeding under Chapter 15 of the U.S. Bankruptcy Code.