Liquidating loans definition audio
In its memorandum, the IRS concluded that the IRC Section 752 definition of a partnership recourse loan is limited to the determination of a partner’s basis, because Treasury Regulation 1.752-1(a) specifically states that these definitions of recourse and nonrecourse liabilities apply to only that section.The Section 752 allocation tests and the general partner basis principles address the issue of whether a debt is recourse or nonrecourse to the partners – and not to the partnership. It is possible for a debt to be recourse to an individual partner, for Section 752 purposes and, yet, be nonrecourse to the partnership borrower.Although the IRS did not provide a definitive answer to whether the partnership taxpayer’s loan was recourse or nonrecourse in its memorandum, it pointed to a couple of key facts that suggested the loan may be nonrecourse to the partnership taxpayer: First, the partnership taxpayer was an SPE and, therefore, had only one asset, which was the collateral property, to which the lender was limited to, upon default of the loan (the lender had no access to any other partnership assets that were unrelated to the collateral property).
A partner or related person bears the economic risk of that liability if that individual would be obligated to repay the loan, if the partnership were to constructively liquidate.
Different tax consequences will result, depending on the classification of the loan as recourse or nonrecourse.
When a loan is , both COD income and a capital gain (or loss) can result.
But the IRS took the position that the taxpayer partnership’s debt may be nonrecourse and, therefore, the partnership may not have COD income; but a capital gain, to the extent the discharged debt exceeded their basis in the collateral property. In reaching its position, the IRS relied upon referenced the IRC Section 752 definitions of recourse and nonrecourse debt, it did not apply these definitions to the case – instead, it used a “facts and circumstances” test.
The court concluded that the debt must be nonrecourse to the partnership, as there were no other assets beyond the collateral to satisfy the debt.