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.
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.)
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:
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:
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.
- 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.]
- 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).
- 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).