Reference no: EM133119939
Allocation of Partnership Recourse Liabilities
1. On January 1 of year 1, A, B, and C formed ABC, a general partnership. The partnership agreement satisfies the primary test for economic effect. A contributed $70,000, B contributed $20,000, and C contributed $10,000. The partners will share in partnership profits and losses in proportion to their capital accounts. ABC borrowed $900,000 (recourse debt), and then purchased an apartment building for $1 million. (For simplicity, assume ABC leases the land on which the building is located.) How does the debt affect the outside basis of the partners?
2. Assume the facts of problem 1. In year 1, ABC broke even, but it had net cash flow of $200,000. On December 31 of year 1, ABC used this cash to repay $200,000 of the debt. What are the book and tax consequences of repayment?
3. Assume the facts of problem 1, except that the partners will share equally in partnership profits and losses. How does the debt affect the outside basis of the partners?
4. Assume the facts of problem 1, except that A personally guarantees the debt. Additionally, disregarding their partnership interests, B and C have a net worth of $0. How does the debt affect the outside basis of the partners?
5. Assume the facts of problem 1, except that ABC is a limited partnership and B and C are the limited partners. The partnership agreement satisfies the alternate test for economic effect, but does not create any deficit restoration obligations. How does the debt affect the outside basis of the partners?
6. Assume the facts of problem 1, except that ABC is a limited partnership and B and C are the limited partners. The partnership agreement satisfies the alternate test for economic effect, and upon liquidation, B must restore any capital account deficit up to $100,000. The partnership agreement does not create any other deficit restoration obligations. How does the debt affect the outside basis of the partners?
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