Answers · Partnerships · Form 1065
Recourse vs. Nonrecourse Partnership Debt
Partnership liabilities can increase outside basis, but allocation differs between recourse and nonrecourse debt under IRC §752 regulations.
This question is answered in full on the main page for it.
How it works
The rule, and what it turns on.
Recourse generally follows economic risk of loss; nonrecourse uses regulatory allocation methods. Liability decreases are generally deemed cash distributions.
Example
A $50,000 reduction in a partner’s debt share is generally treated as a $50,000 cash distribution for basis purposes.
Common mistakes
What we see go wrong, and what we do instead.
- Allocating all debt by ownership percentage.
- Ignoring guarantees.
A better approach
- Perform a §752 liability analysis when debt or ownership changes.
Authority
Where this comes from, so you can check it.
IRC §§705, 722, 733 and 752; Treas. Reg. §§1.705-1 and 1.752-1 through -5; IRS Publication 541.
Relevant case law
Crane v. Commissioner, 331 U.S. 1 (1947), and Commissioner v. Tufts, 461 U.S. 300 (1983) - important authorities on
liabilities, basis, and amount realized.
Educational information, not individualized tax advice. Treatment depends on your facts, entity classification and tax year, and IRS instructions change. Confirm your own position with us before relying on it. Mint Associates does not provide legal services.
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