Constructive liquidation scenario prior to a partners

Constructive Liquidation Scenario:
Prior to January 30, 1989 a partner’s share of recourse debt was determined in accordance with the loss
sharing ratio of the partnership (Reg. § 1.752-2(a)). The sharing of partnership debt created after
January 29, 1989 is determined by the application of the Constructive Liquidation Scenario (Reg. § 1.752-
2). This scenario uses a hypothetical process to determine the amount of loss any partner bears with
regard to partnership liabilities and is determined using the following method.
 All assets are deemed worthless.
o (FMV= $0).
 The worthless assets are then deemed sold at FMV.
o ($0 – adjusted basis of the assets = deemed loss).
 Deemed losses are posted to the partners’ capital accounts based on their loss sharing ratio in
the partnership agreement.
 Any capital account that has a negative balance as a result of this allocation is restored by a
deemed contribution from the partners with negative capital account balances.
 The amount a partner is required to contribute under this hypothetical scenario is the amount of
the partner’s risk of loss with regard to partnership liabilities.
Example: A, B, C and D form a general partnership. The partnership agreement states that they share
profits equally, but losses are shared 15%, 15%, 20% and 50% respectively. As of December 31 st the
ABCD Balance Sheet is as follows:
Book Basis Tax Basis
Cash $20,000 $20,000
Receivables 15,000 5,000
Land & Buildings 150,000 100,000
Total Assets 185,000 125,000
Recourse debt 85,000 85,000
6

A Capital 25,000 10,000
B Capital 25,000 10,000
C Capital 25,000 10,000
D Capital 25,000 10,000
Total Debt and Equity 185,000 125,000
Determine the amount of each partner’s share of partnership liabilities.
7