[MWest33330q4CPA]

Could someone please explain the question below regarding Partnership basis and liabilities.

A $100,000 increase in partnership liabilities is treated in which of the following ways?

a. Increases the partners’ bases only if the liability is nonrecourse.

b. Increases each partner’s basis in the partnership by $100,000.

c. Does not change any partner’s basis in the partnership regardless of whether the liabilities are recourse or

nonrecourse.

d. Increases each partner’s basis in proportion to their ownership.

The correct answer is D. Why is A not the correct answer

Becker offers this as an explanation which is even more confusing: “Partnership basis will increase in proportion to the partner’s economic loss percentage (risk) if the debt is recourse. Partnership basis may increase if the debt in nonrecourse, but there are limitations (beyond the scope of the exam)”. Thanks

[Kimboroni]

Basically, they want you to remember that an increase in partnership liabilities increases each partner's

basis in proportion to their ownership percentage, and that you should ignore any complicating factors of recourse vs. nonrecourse as that is too complex for the exam. (A 25% partner will generally have a basis increase of $25,000 for an increase in partnership debt of $100,000.)

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[Mika]

Do we have to know the difference between recourse liabilities vs non-recourse liabilities in the exam?

So it is correct if the answer is “Increases the partners' bases only if the liability is recourse”?

REG - 80 (02/13/2015) Roger + Ninja Flash Card + Ninja MCQ + Becker's Note
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BEC - 77 (08/27/2015) Roger + Ninja MCQ + Half Wiley book questions
AUD - 87 (08/28/2015) Roger + Ninja MCQ + Half Wiley book questions

[OneGiantWarrior]

Partner's basis will include both recourse and non recourse liabilities. The only time you need to know if it's recourse or nonrecourse is when determining at-risk basis. At-risk basis is the same as partner's basis except that at-risk basis only increases with recourse debt and will not increase with non recourse debt.

[MWest33330q4CPA]

Thank you.. Is this the same with S-corps or do S-corps not include the partnership liabilities in the basis including at-risk calculation.

[taxgeek83]

Basis in S corps and basis in partnerships are two completely separate things. A shareholder's basis in an S corp will increase by any amount of money he lends to the S corp (in other words, debt basis).

When you are talking about partnership liabilities, that has nothing to do with S corps.

[Anonymous]

Here's a good example:

Bob contributed land (basis $100,000; FMV $250,000 subject to a mortgage of $50,000 in exchange for a 50% pship interest. Sue contributed cash of $200,000 for her 50% interest. Calculate Bob and Sue’s partnership bases.

Bob's Basis= 100k -50k + .5*(50k)= 75

Sue's basis= 200k + .5*(50k)= 225

Here's an explanation of Recourse vs Non-recourse

Recourse – partners have personal liability

Nonrecourse – no partner is personally liable (generally secured debt)

Here's a more comprehensive list of increases and decreases of basis:

Initial basis (from Sec. 721 exchange or purchase, inherit etc.)

1 Increase Partner’s basis:

a. Partner's distributive share of partnership income

b. Partner's distributive share of tax-exempt partnership income

c. Additional contributions from partner to partnership

d. Partner's share of partnership liabilities

2. Decrease Partner’s basis:

a. Distributions from partnership to partner (including decreases in partner’s share of debt which are deemed distributions)

b. Partner's distributive share of partnership losses

c. Partner's distributive share of nondeductible expenses

[Author]

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