Partnership Allocations: Nonrecourse Deductions and Liabilities

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Partnership AllocationsNonrecourse
Deductionsand Liabilities
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Tufts

• basic facts property disposed of when FMV of
  1,400,000 and adjusted basis of 1,450,000,
  subject to nonrecourse liability of 1,850,000
• holding PS recognized gain of 400,000
  (1,850,000 AR less 1,450,000 AB)
• 7701(g) codifes Tufts clarifying that FMV
  deemed to be not less than the amount of the
  nonrecourse liabilities secured by the property

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Example 5-1
PS purchases prop for 60,000 cash and 240,000
NR liab 10,000 dep annually
recourse deds 60,000 nonrecourse deds
remaining 240,000
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Safe Harbor for Nonrecourse Deductions

• Four requirements
• PS agreement satisfies the requirements of the
  basic or alternate economic effect test (capital
  account maintenance, liquidating distributions,
  full or limited DRO)
• nonrecourse deductions are reasonably
  consistent with other deductions that have
  substantial economic effect (consistency
  requirement)
• PS agreement contains a minimum gain chargeback
  (MGC) provision
• all other material allocations are valid

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Example 5-1
PS purchases prop for 60,000 cash and 240,000
NR liab 10,000 dep annually
PS allocates all 10,000 dep in Yr 7 to A sale
at end of Yr 7 produces 10,000 gain (240,000 AR
less 230,000 basis)
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PMG

• PMG future Tufts gain that PS would recognize
  if it sold property subject to NR debt for no
  consideration other than relief of the NR debt,
  see 7701(g)
• keeps track of size of partners promise to be
  allocated future income or gain equal to prior NR
  deds (and nonrecourse distributions) not yet
  charged back

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Net Increase/Decrease in PMG

• net increase in PMG gives rise to corresponding
  amount of NR deductions
• net decrease in PMG triggers a MGC (e.g., when
  property sold)

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Example 5-5
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Example 5-5(contin.)
PS prop sold at beginning of YR 4 for 1,200
(450 cash plus 750 relief of NR liab
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blank
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Exceptions to MGC

• no MGC to extent that a partners share of the
  net decrease is attributable to conversion of
  debt from nonrecourse to recourse (and partner
  bears the EROL)
• no MGC if capital contribution used to repay
  nonrecourse debt (or to improve property)
• no MGC if prop is revalued

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Example 5-6
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Question
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Nonrecourse Distributions

• distributions attributable to the proceeds of NR
  borrowing to the extent that such borrowing gives
  rise to an increase in PMG

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Example 5-7
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Problem 5-1(a)
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Problem 5-1(b)
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Problem 5-1(c)
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Problem 5-1(d)
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Problem 5-1(e)
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Problem 5-1(f)