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1065 returns

Allocating Nonrecourse Debt

This template computes the allocation of nonrecourse liabilities owed to or guaranteed by partners or partner affiliates.  In the case of a true nonrecourse liability, no partner bears any risk of economic loss. Consequently, the partners’ shares of basis attributable to this type of liability must be determined in a manner other than by analyzing their relative economic risks of loss, which is the approach used to allocate recourse liabilities.

Computing 1st Tier Minimum Gain

From the user's input, the template calculates the amount of 1st tier minimum gain.  Computing minimum gain under the first tier is determined in accordance with the rules of IRC Sec. 704(b) and the related regulations [Reg. 1.752-3(a)(1)]. Minimum gain is first computed for true nonrecourse liabilities and then for exculpatory liabilities (liabilities that are recourse to the partnership but not to the partners).  
Based on user input about the partners’ percentage allocation of nonrecourse deductions, the template performs the allocation of the 1st tier minimum gain.  (See "Entering Information” below.)

Computing 2nd Tier Minimum Gain

The user must calculate this amount and enter it on the input sheet.  
Computing Section 704(c) minimum gain under the second tier is as if there were a hypothetical taxable disposition of property to satisfy true nonrecourse liability (and no other consideration) [Reg. 1.752-3(a)(2)].  According to Section 704(c), minimum gain is generally the difference between the tax basis and the property's FMV at the time of its contribution to the partnership, adjusted for subsequent depreciation.
The user must calculate the allocation of the 2nd tier minimum gain, which is generally allocated to the contributing partner.  The 2nd tier amount can be allocated under any of the following methods:
  1. Traditional allocation method
  2. Traditional method with curative allocations
  3. Remedial allocation method
  4. Other reasonable method (See PPC's 1065 Deskbook, Chapter 25.)

Computing 3rd Tier Minimum Gain

The program calculates the amount of 3rd tier minimum gain.  The user, however, must select the allocation method.  After completing the input (see “Entering Information” below), the method of allocation must be selected.
Select one of the three allocation methods by clicking the appropriate button:
  • Partner’s share of profits
  • Likely allocations of deductions attributable to debt
  • Built in gain allocable

Entering Information

All of the information needed to produce the computation is entered on the Input worksheet.  The yellow highlighted cells are calculated fields, and no data should be entered in these cells.  Any gray cells are not calculated fields, but data should not be entered in these cells.

Enter the following information:

  • Partnership true nonrecourse debt [as defined in Reg. 1.752-1(a)(2)]
  • Partnership exculpatory liabilities
  • Partner nonrecourse debt
  • Adjusted Book Basis of:
- Assets securing exculpatory liabilities
- Assets securing true nonrecourse debt [Pursuant to Reg. 1.704-2(d)(3), instead of using tax basis to compute  minimum gain, use the property's book basis, which is determined under the IRC Sec. 704(b) safe harbor rules.]
  • Book value of other partnership assets

For each partner, enter the following information:

  • Partner number
  • Partner name (optional)
  • Percentage allocation of nonrecourse deductions [under Reg. 1.704-2] (Enter percentages as decimals, 90 percent as .90, for example.)
  • Amount of allocation of Section 704(c) minimum gain under tier two (See “Computing 2nd Tier Minimum Gain.”)
  • Percentage allocation of partners' share of profits (Enter percentages as decimals, 90 percent as .90, for example.)
  • Likely percentage allocations of deductions attributable to the debt (Enter percentages as decimals, 90 percent as .90, for example.)
  • Amount of built-in gain allocable to the partner on Section 704(c) property (to the extent not used in tier two):
- Enter each partner's share of tier three built-in gain. This amount will depend on the method used in tier two, which will also be used on any remaining amount to be allocated in tier three if this method is selected for tier three (to the extent not used in tier two).
  • Amount of allocation of partner nonrecourse liabilities:
- Enter each partner’s share of nonrecourse debt, which is allocated 100 percent to the partner who bears the economic risk of loss with respect to such debt (or whose affiliate bears such risk).