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 ofthe 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 31stthe ABCD Balance Sheet is as follows:Book BasisTax BasisCash$20,000$20,000Receivables15,0005,000Land & Buildings150,000100,000Total Assets185,000125,000Recourse debt85,00085,000 6
A Capital25,00010,000B Capital25,00010,000C Capital25,00010,000D Capital25,00010,000Total Debt and Equity185,000125,000Determine the amount of each partner’s share of partnership liabilities. 7
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