Question

Krypton Partnership owns and operates an office building in the medical district of a large city. The property was contributed to the partnership several years ago by partner K. Under the terms of the partnership agreement, K is allocated 20% of the partnership’s profits, gains, losses and deductions, other than depreciation. Depreciation is allocated 50% to K and 50% to the other partners. The office building is encumbered by a nonrecourse mortgage of $750,000. Its tax basis is $650,000 and its book value is $875,000.

a.Under the general rules governing the allocation of partnership nonrecourse liabilities, how much of the nonrecourse liability will be allocated to K?

b. Would an allocation of $425,000 of the nonrecourse liability to K be acceptable under the regulations? Explain.

c. What about an allocation of $330,000?

d. Could the partnership allocate $475,000 of the liability to K this year and change the allocation to $330,000 next year (adjusted for changes in the tax basis and book value of the property)?

Answer 1

A. Allocation for Non Recourse Liability - 425000

B Explanation for Allocation

Non Recourse Liability - 750000

Book Value 875000

Tax Value 650000

The difference between the Non Recouse and Tax value would be allocaated to the partner who contributed the asset, i.e, $100,000. The balance 650000(750000-100000) would be allocated based on the percentage of profit and loss/liability agreed among them.(Depreciation agreed 50% by K)

Amoun agreed by K 20% - 650000*.50= 325000

Total Liability = $100,000+$ 325,000= $425,000/-

C. Allocation for remaining $330,000

Any remaining non recourse debt is allocated to the partners in acccordance with the Profit and loss sharing ratio by the remaining partners.

D. No.