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IRC 752 – Allocation of Debt Among Partners

This month’s newsletter focuses on an oldie but goodie: IRC 752 — Allocation of debt among partners — the fundamentals. For various reasons, we have been called up on to consult with accounts on the allocation of liabilities among partners — remember those boxes you have to check on the K-1’s? Almost invariably the liability allocations are wrong. It is not surprising since the rules are arcane and generally unknown to all but a select few.

The primary area that we are seeing this come up recently is in debt cancellation cases. In order to figure out how the CODI is allocated, you have to know how the debt was allocated initially — make sense? So we all happily look at the K-1’s right? But this is where the garbage in, garbage out rule comes into play — most often these allocations are wrong or outdated. The allocation of debt issue is a year-by-year analysis as the debts can change and the financial arrangement among the partners can change. Partnerships may convert to LLCs or vice versa. So you can’t just look at last year and apply it to this year. Additionally, novel questions can arise such as how do you allocate debt when you have a 1% LLC as a general partner in a limited partnership and all the owners own the same percentages in each entity but there are no personal guaranties?

Never fear, WKBKY has designed a simple outline that our attorneys use when they teach partnership taxation which we thought we would deliver to your doorstep. You will find it below. Hand it out to your coworkers. If you would like us to meet with your staff and coworkers and go over it, let us know and we will have one or our tax attorneys either meet with you in person or do a phone call gratis. It will make all our jobs easier later if we are called in to help with an audit or litigation.

Click here to download a PDF copy of this article.

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