Advanced Tax Strategies for LLCs and Partnerships

Chapter 3Allocation of Partnership Recourse Liabilities Under Section 752

Learning objectives

• Recognize how liabilities affect the calculation of a partner’s or member’s basis and at-risk amount in his or her partnership or LLC interest.
• Calculate the gain that can result from reallocation of liabilities when a partner joins a partnership.
• Distinguish between recourse and nonrecourse liabilities of a partnership or LLC.
• Calculate a partner’s or member’s share of recourse liabilities of a partnership or LLC.

How liabilities affect partner tax consequences

Basic concepts

Because partners are (in theory) ultimately liable for partnership debts, liabilities increase the partners’ potential losses in the event of partnership dissolution. Accordingly, they must be included in the partners’ bases in their partnership interests, and changes in either the total level of partnership indebtedness or in the way in which partners share in that indebtedness must be accounted for on an ongoing basis.

The partnership is essentially disregarded from a tax standpoint when accounting for partnership debts. The partners’ shares of partnership indebtedness flow through to the partners who are then treated as if they had made cash payments to the partnership in a like amount. Of course, since the statute treats partnership debts as indirect cash payments made by the partners, any reduction in partnership indebtedness must also be treated as a cash payment, albeit to the partners, rather than ...