The IRS has provided a safe harbor in Revenue Procedure 2012-28, under which it will not challenge a determination by a publicly traded partnership (PTP) that income from discharge of indebtedness is qualifying income under Code section 7704(d).

While Code Section 7704(a) generally treats a PTP as a corporation, it won't be treated as a corporation if meets the gross income requirement of Section 7704(c)(2), which requires that 90 percent or more of the gross income of the partnership consist of qualifying income.

Qualifying income is specified in Code Section 7704(d)(1). It includes interest, dividends, real property rents, and gain from the sale or other disposition of real property and of a capital asset, among other things. 

Revenue Procedure 2012-28 provides that it won't challenge publicly traded partnerships with cancellation-of-debt income that use the Code Section 7704(c) qualifying income exception to avoid corporate treatment. The IRS says that it will not challenge a PTP's determination that COD income is qualifying income if the COD income is attributable to debt incurred in direct connection with activities of the PTP that generate qualifying income. The PTP may demonstrate that COD income is attributable to debt incurred in direct connection with the PTP's qualifying activities by any reasonable method.

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