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)