CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, Partnership Delta, has two partners, E and F, who each have a 50% interest in profits and losses. The partnership has a nonrecourse debt of $100,000. Partner E's individual nonrecourse debt is $20,000, and Partner F's individual nonrecourse debt is $10,000. How much of the partnership's nonrecourse debt is allocated to Partner E for basis purposes, assuming no minimum gain exists?
- A$50,000
- B$25,000
- C$70,000
- D$60,000
Show answer & explanationAnswer & explanation
Correct answer: A. $50,000
Nonrecourse debt is allocated among partners based on their share of partnership profits. Since E has a 50% interest in profits, 50% of the $100,000 nonrecourse debt is allocated to E. Individual nonrecourse debt is irrelevant to the allocation of partnership nonrecourse debt. So, $100,000 * 0.50 = $50,000.
Why the other options are wrong
- B. Incorrect. This would imply a 25% allocation.
- C. Incorrect. This might arise from incorrectly adding individual debt or an incorrect allocation percentage.
- D. Incorrect. This might arise from mistakenly adding individual debt or an incorrect allocation percentage.
Partnership Nonrecourse Debt Allocation
Partnership nonrecourse debt is allocated among partners based on their share of partnership profits, after considering minimum gain and Section 704(c) minimum gain.
- Allocated based on profit-sharing ratios.
- Minimum gain allocations take precedence.
- Section 704(c) minimum gain allocations also take precedence.
- Increases a partner's basis in their partnership interest.
Memory trick: Recourse to Responsibility, Nonrecourse to Profit.