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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) - PowerPoint PPT Presentation
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04/22/231
Partnership Allocations:Nonrecourse Deductions
and Liabilities
04/22/232
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
04/22/233
Example 5-1
Basis of property $300,000Yr 1-6: depreciation (60,000)End Yr 6 $240,000
recourse deds: $60,000
nonrecourse deds: remaining $240,000
PS purchases prop for $60,000 cash and $240,000 NR liab; $10,000 dep annually
04/22/234
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
04/22/235
Example 5-1
Yr 1-6: depreciation (60,000)End Yr 6 240,000
Yr 7: dep (10,000)End Yr. 7 $230,000
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)
04/22/236
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
04/22/237
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)
04/22/238
Example 5-5
Adjusted Nonrecourse PMG Net Increase Basis Liabilities (Decrease)
in PMGEnd Year 1 $800 $750 -0- NAEnd Year 2 600 750 150 150End Year 3 400 750 350 200End Year 4 -0- -0- -0- (350)
04/22/239
Example 5-5(contin.)G L
Initial Balance $50 $200Year 1: recourse deductions (20:80) (40) (160)End Year 1 10 40Year 2: nonrecourse deductions (50:50) (75) (75) recourse deductions (20:80) (10) (40)End Year 2 (75) (75)Year 3: nonrecourse deductions (50:50) (100) (100)End Year 3 (175) (175)Year 4: $350 gain from sale (MGC) 175 175
$250 gain from sale (20:80) 50 200$200 gain from sale (60:40) 120 80
End Yr 4 $170 $280PS prop sold at beginning of YR 4 for $1,200 ($450 cash plus $750 relief of NR liab
04/22/2311
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
04/22/2312
Example 5-6
G LEnd Yr 3 ($175) ($175)Year 4: G’s contribution 250 0 MGC 0 25 bottom-line loss (225) 0
End Year 4 ($150) ($150)
Adjusted Nonrecourse PMG Net Increase
Basis Liabilities (Decrease)
in PMG
End Year 3 400 750 350 200
End Year 4 200 500 300 (50)
04/22/2313
Question
G L
End Year 3 ($175) ($175)
Year 4: contribution 250
MGC
depreciation (200) 0
End Year 4 ($125) ($175)
04/22/2314
Nonrecourse Distributions
distributions attributable to the proceeds of NR borrowing to the extent that such borrowing gives rise to an increase in PMG
04/22/2315
Example 5-7Nonrecourse PMG Net Increase
Adjusted Liabilities (Decrease) Basis in PMG
End Year 3 $400 $750 $350 $200End Year 4 200 950 750 400
G LEnd Year 3 ($175) ($175)Year 4: nonrecourse distribution (100) (100) nonrecourse deds (50:50) (100) (100)End Year 4 ($375) ($375)
04/22/2316
Problem 5-1(a)
G LInitial $60,000 $140,000Year 1-2: dep. (60,000) (140,000)End Year 2 0 0Year 3: dep. (30,000) (70,000)End Year 3 ($30,000) ($70,000)
04/22/2317
Problem 5-1(b)
G LInitial $60,000 $140,000Year 1: dep. (10,000) (90,000)
End Year 1 50,000 50,000Year 2: dep. (10,000) (90,000) (50,000)
realloc (40,000) 0End Year 2 0 0Year 3: (10,000) (90,000) ?End Year 3 ($10,000) ($90,000) ?
04/22/2318
Problem 5-1(c)
G LInitial $60,000 $140,000Year 1-2: dep. (60,000) (140,000)End Year 2 0 0Year 3: dep. (50,000) (50,000)End Year 3 ($50,000) ($50,000)
04/22/2319
Problem 5-1(d)
G LEnd Year 3: ($30,000) ($70,000)Year 4: capital contrib 45,000 105,000
recourse dep. (30,000) (70,000)End Year 4 ($15,000) ($35,000)
04/22/2320
Problem 5-1(e)
G LEnd Year 3: ($30,000) ($70,000)Year 4: MGC 70,000
bottom-line loss (170,000) -0-End Year 4 ($200,000) $0
04/22/2321
Problem 5-1(f)
G LEnd Year 3: ($30,000) ($70,000)Year 4: NR distrib. (60,000) (140,000)
NR dep. (30,000) (70,000)End Year 4 ($120,000) ($280,000)
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