Reallocate in Accordance with Interests in P’ship i. Reg. § 1.704-1(b)(3)(iii): if first 2 parts of the basic test are met, compare the manner in which distributions and contributions would be made if the p’ship liquidated at the end of the current year and at the end of the previous year 1. Since there is no previous year, look at the situation just before the partnership assets were deemed worthless Distribution To (Contribution By) A B C “Previous” Year $20k $20k $20k End of Current Year ($15k) 0 ($25k) Difference = Share of $100k Loss $35k $20k $45k ii. Capital Accounts Partner Beg. Capital Account Share of Loss End. Capital Account A $20k ($35k) ($15k)* B $20k ($20k) $0 C $20k ($45k) ($25k) *note: the negative capital account is OK b/c of the limited deficit restoration obligation iii. Share of Liabilities 1. § 752(a): increase in partner’s share of p’ship liability is considered as a contribution of money to the p’ship 77 This is a guess Note: not verified
2. § 722: partner’s basis in his partnership interest = money + AB of property contributed Partner Beg. Outside Basis Increased/Decreased Share of Liability End. Outside Basis A $20k $15k $35k B $20k $0k $20k C $20k $25k $45k 6. (e) What result in (c), above, if A personally guarantees the $40,000 liability? a. Reimbursement Issue i. Reg. § 1.752-2(b)(1): a partner bears the economic risk of loss for a partnership liability to the extent that, if the partnership constructively liquidated, the partner or related person would be obligated to make a payment to any person . . . and the partner would not be entitled to reimbursement from another partner ii. Reg. § 1.752-2(b)(5): a partner’s obligation to make a payment is reduced to the extent that the partner is entitled to reimbursement iii. If A has subrogation rights (i.e., he steps into the shoes of the lender, and can go after p’ship assets and C’s assets), A does not bear the economic risk of loss for the $40k liability iv. A would have to waive these subrogation rights to bear the economic risk of loss b. Deemed Satisfaction of Obligation i. Reg. § 1.752-2(b)(6): it is assumed that all partners who have obligations to make payments actually perform those obligations ii. If the terms of the guarantee make the lender exhaust the p’ship assets and C’s assets, it’s assumed the lender will get satisfaction from these sources and will not have to go after A 1. We assume that C will make payment on the liability (even if he’s insolvent) iii. To get around this, A would have to give the direct right to go after himself, irrespective of whether he’s exhausted the p’ship assets or C’s assets c. Nonrecourse Liabilities i. Partner’s Share of Nonrecourse Liabilities. A partner’s share of nonrecourse liabilities equals the sum of: 1. Partnership Minimum Gain. The partner’s share of partnership minimum gain under § 704(b). Reg. § 1.752-3(a)(1). a. Defined. The amount of PMG is the aggregate amounts of any gain the p’ship would realize if it disposed of property subject to a NR liability for no consideration other than full satisfaction of the liability.
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