Chapter 8 Debt Allocations.ppt - Agenda u2022 Finish...

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Agenda 4/3/2014 Finish section 704(c) Partnership Liabilities Recourse Liabilities Nonrecourse Liabilities 1
Partnership Liabilities: Preliminary Matters 2
Sec. 704(d). Partner's distributive share… (d) Limitation on allowance of losses. A partner's distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss occurred. Any excess of such loss over such basis shall be allowed as a deduction at the end of the partnership year in which such excess is repaid to the partnership. 3 Partnership Liabilities: Preliminary Matters
Sec. 731(a)(1) Extent of recognition of gain or loss on distribution (a)(1) gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner's interest in the partnership immediately before the distribution… 4 Partnership Liabilities: Preliminary Matters
Partnership Liabilities: Preliminary Matters What is a liability? § 1.752-1(a)(4)(i) defines what it refers to as “§ 1.752-1 liabilities” as those obligations that: Create basis Give rise to an immediate deduction, or Give rise to an expense described in § 705(a)(2) (B). 5
Treas. Reg. Sec. 1.752-1(a) (1) A partnership liability is a recourse liability to the extent that any partner or related person bears the economic risk of loss for that liability. (2) partnership liability is a nonrecourse liability to the extent that no partner or related person bears the economic risk of loss for that liability Partnership Liabilities: Preliminary Matters 6
Partnership Liabilities: Recourse 7
Treas. Reg. Sec. 1.752-2(b) The worst case scenario determines the economic risk of loss. 1. All partnership liabilities become due and payable; 2. All assets become worthless (except for certain property used solely as security); 3. All partnership assets are disposed of in taxable exchanges for no consideration; and 4. The partnership allocates all items of income, etc for its last taxable year ending on the date of the constructive liquidation. 5. The partnership liquidates. Partnership Liabilities: Recourse 8
$20 $160 Land financed with $160 mortgage. Partnership Liabilities: Recourse 50% interest 50% interest $20 $200 Lender Seller Land Note Example 1 Basic Facts 9 A B XY
Assets Tax Basis Book Land 200 200 Mortgage 160 Cash 0 0 Capital Accounts Tax 704(b) Bk A 20 20 B 20 20 Partnership Liabilities: Recourse Liabilities Example 1A : What is each partner’s initial share of the liability? 10
Example 1A AB Balance Sheet Assets Tax Basis Book Land 200 200 Mortgage 160 Cash 0 0 Capital Accounts Tax 704(b) Bk A 20 20 B 20 20 Partnership Liabilities: Recourse Liabilities (2) All assets become worthless. (2) All assets become worthless.

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