THE RISKY BASIS FOR PARTNERSHIP ALLOCATIONS

• Published in: The Tax lawyer Vol. 38; no. 1; pp. 119 - 159
• Main Authors: Kalish, Arthur, Rosen, Jeffrey J.
• Format: Journal Article
• Language: English
• Published: Washington Section of Taxation, American Bar Association 01-10-1984; American Bar Association
• Subjects: Allocations; Capital account; Collaboration; Disposition of partnerships; Economic impact; Financial liabilities; Financial risk; General partners; Internal Revenue Code; Liabilities; Limited partnerships; Losses; Nonrecourse; Nonrecourse loans; Partnership capital; Partnerships; Personal liability; Risk; Tax attorneys; Tax basis; Tax deductions; Tax liabilities
• ISSN: 0040-005X; 2329-6089

The Internal Revenue Code (IRC) gives 3 distinct sets of rules to restrict the extent to which a partner may deduct partnership losses. Under Section 704(d), a partner may deduct his share of the loss only to the extent of the adjusted basis of the partner's interest in the partnership. Section 465(a) allows losses to be deducted only to the extent that the partner is at risk with respect to the partnership. Section 704(b) requires that a partner to whom losses are allocated must be the partner who will bear the losses. These rules were designed to ensure that the deduction of partnership losses is in accordance with economic reality, but the rules are often inconsistent with each other and leave many questions unanswered. These rules seem to work, but they would work more efficiently if ambiguities are clarified regarding both the characterization of liabilities as recourse or nonrecourse and the uncertainty of whether the lender should be regarded as the equity owner.