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Partnership Allocations: Nonrecourse Deductions and Liabilities

Partnership Allocations: Nonrecourse Deductions and Liabilities. Tufts. basic facts: property disposed of when FMV of $1,400,000 and adjusted basis of $1,450,000, subject to nonrecourse liability of $1,850,000 holding: PS recognized gain of $400,000 ($1,850,000 AR less $1,450,000 AB)

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Partnership Allocations: Nonrecourse Deductions and Liabilities

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  1. Partnership Allocations:Nonrecourse Deductionsand Liabilities

  2. Tufts • basic facts: property disposed of when FMV of $1,400,000 and adjusted basis of $1,450,000, subject to nonrecourse liability of $1,850,000 • holding: PS recognized gain of $400,000 ($1,850,000 AR less $1,450,000 AB) • § 7701(g) codifes Tufts: “clarifying” that FMV deemed to be not less than the amount of the nonrecourse liabilities secured by the property

  3. Example 5-1 PS purchases prop for $60,000 cash and $240,000 NR liab; $10,000 dep annually recourse deds: $60,000 nonrecourse deds: remaining $240,000

  4. Safe Harbor for Nonrecourse Deductions • Four requirements: • PS agreement satisfies the requirements of the basic or alternate economic effect test (capital account maintenance, liquidating distributions, full or limited DRO) • nonrecourse deductions are “reasonably consistent” with other deductions that have substantial economic effect (consistency requirement) • PS agreement contains a “minimum gain chargeback” (MGC) provision • all other material allocations are valid

  5. Example 5-1 PS purchases prop for $60,000 cash and $240,000 NR liab; $10,000 dep annually PS allocates all $10,000 dep in Yr 7 to A; sale at end of Yr 7 produces $10,000 gain ($240,000 AR less $230,000 basis)

  6. PMG • PMG: future Tufts gain that PS would recognize if it sold property subject to NR debt for no consideration other than relief of the NR debt, see § 7701(g) • keeps track of size of partner’s “promise” to be allocated future income or gain equal to prior NR deds (and “nonrecourse distributions”) not yet charged back

  7. Net Increase/Decrease in PMG • net increase in PMG gives rise to corresponding amount of NR deductions • net decrease in PMG triggers a MGC (e.g., when property sold)

  8. Example 5-5

  9. Example 5-5(contin.) PS prop sold at beginning of YR 4 for $1,200 ($450 cash plus $750 relief of NR liab

  10. Exceptions to MGC • no MGC to extent that a partner’s share of the net decrease is attributable to conversion of debt from nonrecourse to recourse (and partner bears the EROL) • no MGC if capital contribution used to repay nonrecourse debt (or to improve property) • no MGC if prop is revalued

  11. Example 5-6

  12. Question

  13. Nonrecourse Distributions • distributions attributable to the proceeds of NR borrowing to the extent that such borrowing gives rise to an increase in PMG

  14. Example 5-7

  15. Problem 5-1(a)

  16. Problem 5-1(b)

  17. Problem 5-1(c)

  18. Problem 5-1(d)

  19. Problem 5-1(e)

  20. Problem 5-1(f)

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