8034 excess nonrecourse liabilities tier 3 as

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¶ 8.03[4] Excess Nonrecourse Liabilities (Tier 3) As discussed, the allocation rules relating to nonrecourse liabilities generally attempt to ensure consistency with the economics of the partnership by requiring that the basis attributable to nonrecourse liabilities inures to partners in the same manner that those partners will be allocated partnership profits. The first two tiers of Regulations § 1.752-3(a) allocate nonrecourse liabilities directly to the partners to whom gain would be allocated under § 704 if the partnership sold the encumbered property for an amount equal to the liability. The linkage in tier 3 is much less direct, since this tier is composed of “excess” liabilities—liabilities not directly related to any specific gain allocation, and hence not allocated pursuant to tier 1 or tier 2. Accordingly, the § 752 Regulations give the partners considerable latitude in allocating tier 3 liabilities, requiring only that they must be allocated among the partners in accordance with the partners' share of partnership profits. A partnership is not locked into its selection of method, but may change from year to year. First, a partnership may simply allocate excess nonrecourse liabilities under an amorphous “facts and circumstances” analysis, where the economic arrangement of the partners is scrutinized to determine the manner in which they share partnership profits. Because Regulations § 1.752-3(a) (3) refers to all the facts and circumstances relating to “the economic arrangement of the partners” and to significant items of income or gain that “have substantial economic effect,” one would expect § 704(c) and § 704(c) equivalent allocations under § 704(b) to be ignored because they do not reflect economics or substantial economic effect. The Service, however, has taken the questionable position that § 704(c) allocations must be taken into account in allocating excess nonrecourse deductions to the extent that they are not taken into account for purposes of allocating nonrecourse liabilities under tier 2. Example 8-12 A and B form partnership PRS . A contributes depreciable property subject to a nonrecourse liability of $6,000. The property has a basis of $4,000 and value of $10,000. B contributes $4,000 in cash. The initial § 704(b) book value of the property is $10,000 even though its basis is $4,000. Thus, the initial capital accounts of A and B are equal and A and B agree to share § 704(b) “book” profits and losses equally. 122 123 124 125
2/14/2020 Checkpoint | Document 7/11 Assume that PRS uses the traditional method for § 704(c) purposes. Thus, initially no nonrecourse liabilities are allocated to A and B under tier 1 (the minimum gain tier) and $2,000 of nonrecourse liabilities are allocated to A under tier 2 (the § 704(c) tier). This leaves $4,000 of excess nonrecourse liabilities to be allocated under tier 3.

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