In: Accounting
X is the general partner with a 20% interest, and Y is the limited partner with an 80% interest in the XY Partnership. How is partner X's basis affected if Y guarantees a partnership nonrecourse loan of $50,000 to a bank? (assume that no waivers or additional contribution requirements exist) A) X gets a $10,000 increase in basis, B) X gets a $40,000 increase in basis, C) X gets a $50,000 increase in basis, D) X gets no increase in basis.
Ans) Option (D) X gets no increase in basis
A nonrecourse liability is defined as a partnership liability for which no single partner bears the economic risk of loss. Thus, when a partnership borrows money on a nonrecourse basis, the true risk of loss is born by the lender and not the partner/borrowers. As a result, one might expect that none of the partners would be attributed a portion of basis for these types of liabilities. However, if this were the case, taxpayers would be precluded from deducting depreciation , for example, on assets that they purchased using nonrecourse debt. Accordingly, the new Regulations adopted a technique that is similar to the old Regulations (allowing an allocation), but with an expanded approach to cover the order in which nonrecourse liabilities are allocated. Reg. Sec. 1.752-1(a)(2).
Under the new Regulations, a partner's share of nonrecourse liabilities is equal to the sum of the following three separate elements. Reg. Sec. 1.752-3(a)