CPA Exam — REG (Regulation)Federal Taxation of EntitiesMedium
A client, Partnership XYZ, has three equal partners, A, B, and C. The partnership has a nonrecourse liability of $300,000. Partner A's share of partnership profits is 33.33%. How much of the nonrecourse liability is allocated to Partner A for basis purposes?
- A$0
- B$100,000
- C$33,330
- D$300,000
Show answer & explanationAnswer & explanation
Correct answer: B. $100,000
Nonrecourse liabilities are generally allocated among partners according to their share of partnership profits. Since A has a 33.33% share of profits and the liability is $300,000, A's share is $300,000 * 0.3333 = $99,990, which rounds to $100,000 for equal partners.
Why the other options are wrong
- A. This is incorrect; nonrecourse liabilities are allocated to partners.
- C. This represents 11.11% of the liability, not 33.33%.
- D. This would imply Partner A is responsible for the entire liability, which is incorrect for a 33.33% profit share.
Partnership Nonrecourse Debt Allocation
Nonrecourse liabilities (debt for which no partner bears the economic risk of loss) are generally allocated to partners based on their share of partnership profits.
- Increases a partner's basis in their partnership interest.
- Different from recourse liabilities, which are allocated based on economic risk of loss.
- Allocation rules are detailed under Treasury Regulation §1.752-3.
Memory trick: Partnership Debt: Recourse risk, Nonrecourse profit.