Allocations Attributable to Partner Nonrecourse Liabilities: Issues Revealed by LLCs and LLPs
Susan Pace Hamill
University of Alabama School of Law
Alabama Law Review, Vol. 51, P. 603, 2000
After first presenting a historical overview of partnership tax law (emphasizing sections 752 and 704(b)) and detailing the mechanical rules as they apply to different business organizations that are taxed as partnerships, this article explores the unique nuances that materialize when LLCs and LLPs incur recourse liabilities and raises the fundamental question whether the rules for allocations attributable to partner nonrecourse liabilities can be eliminated. After illustrating how the limited liability feature of LLCs and LLPs leads to different safe harbors (the substantial economic effect or partner nonrecourse) applying to substantively similar situations this article analyzes how the substantial economic effect rules create an opportunity to allocate distributive shares of losses supported by illusory deficit restoration obligations when LLCs and LLPs incur recourse liabilities. This article also illustrates that eliminating the partner nonrecourse debt rules will be difficult because the substantial economic effect safe harbor cannot be easily amended to ensure the proper measurement of losses attributable to liabilites now covered by the partner nonrecourse debt rules.
Date posted: October 4, 2000
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