CPA Exam — REG (Regulation)Federal Taxation of EntitiesHard
A client, a limited partnership, has two partners: a general partner (GP) with a 60% interest and a limited partner (LP) with a 40% interest. The partnership has $100,000 of recourse liabilities. In the current year, the partnership incurs an ordinary loss of $150,000. The GP's basis before losses is $70,000, and the LP's basis before losses is $30,000. How are the recourse liabilities allocated for basis purposes?
- AGP: $60,000; LP: $40,000
- BGP: $50,000; LP: $50,000
- CGP: $0; LP: $100,000
- DGP: $100,000; LP: $0
Show answer & explanationAnswer & explanation
Correct answer: D. GP: $100,000; LP: $0
Recourse liabilities are allocated to partners who bear the economic risk of loss. In a limited partnership, only the general partner typically bears the economic risk of loss for recourse debt. Therefore, the entire $100,000 of recourse liabilities is allocated to the GP. Nonrecourse liabilities would be allocated based on profit-sharing ratios.
Why the other options are wrong
- A. Incorrect. Recourse liabilities are not allocated based on general profit/loss sharing ratios in this manner.
- B. Incorrect. This implies an equal allocation, which is not the rule for recourse liabilities in a limited partnership.
- C. Incorrect. Limited partners generally do not bear the economic risk of loss for recourse liabilities.
Partnership Recourse Liability Allocation
Recourse liabilities are allocated among partners based on who bears the economic risk of loss if the partnership cannot pay the debt. For limited partnerships, this is typically the general partner.
- Allocated based on economic risk of loss
- General partners usually bear economic risk for recourse debt
- Limited partners generally do not share in recourse liabilities unless they guarantee them
Memory trick: Recourse: who's on the hook? Nonrecourse: profit's look.