IRS integrates nonrecourse debt and 704(c) regs

Article Abstract:

The IRS issued Rev. Rul 95-41 to clarify the issue of allocating nonrecourse debt attached to a property contributed to a partnership. The Ruling explains how the choice of method taken by a partnership to close Sec. 704(c) disparities will impact on the allocation of the liability and demonstrates the importance of different allocation techniques under Reg. 1.752-3(a). The first method involves each partner's share of partnership minimum gain based on Sec. 704(b). The second approach involves the amount of taxable gain allocatable to each partner under Sec. 704(c) if the partnership got rid of the property to fully satisfy the liability in a taxable transaction. The third technique involves the balance of the liability according to the interest of each partner in partnership profits. Compared to the first method, the second and third approaches are able to generate more certainty regarding the result.

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Allocations of partner nonrecourse deductions limited by final Regs

Article Abstract:

Section 704 final Regulations on allocations of partnership income and deductions attributable to nonrecourse liabilities places limits on partner deductions based on the economic risk of loss. The final Regulations differ from the normal rules provided by Section 704(b) on partner nonrecourse deductions because deductions are allocable only to the partner at risk under the final Regulations. Partners who are not at risk for a particular loan cannot be allocated nonrecourse deductions even if they possess an unlimited negative capital account restoration obligation or a substantial capital account balance. Regulation 1.704-2(b)(4) specifies that partner nonrecourse liability is in the form of nonrecourse debt when the partner assumes risk under Section 752 Regulations and when the debt is nonrecourse based on gain/loss rules on real property disposals.

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Partnership nonrecourse debt allocations

Article Abstract:

The IRS introduced Revenue Ruling 95-41 to describe how Sec. 704(c) influences the distribution of nonrecourse liabilities under Reg. 1.752-3(a). Although the ruling does indeed explain the impact of Sec. 704(c) on partnership nonrecourse debt allocations under Sec. 752, it fails to answer certain questions. Nevertheless, taxpayers can still use the ruling as an effective tax-planning guideline. Taxpayers who want to take advantage of these opportunities should review all partnership returns for open years during which the partner holds Sec. 704(c) property and the contributing partner got an actual or deemed distribution of cash exceeding basis. This will help determine if using Revenue Ruling 95-41 to the second-tier and third-tier allocations on an updated return would cut the reported gain under Sec. 731(a).

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