As a tax attorney and business attorney, John McGuire of The McGuire Law Firm works with partnerships regarding the impact of partnership debt and the impact of recourse and nonrecourse debt. The article below outlines law to consider regarding partnership debt. If you have a question regarding partnership debt, contact The McGuire Law Firm to speak to a Denver tax attorney or business attorney through a free consultation.
Whether or not debt within a Limited Liability Company (LLC) is recourse or nonrecourse can have a profound impact on certain partners within an LLC. Whether debt is recourse or nonrecourse in the eyes of the Internal Revenue Service is determined by partners actually bearing the risk of economic loss. Under subchapter K of the Internal Revenue Code, all LLC debt, regardless of how the debt is labeled, is treated as nonrecourse debt under an economic risk analysis.
An LLC debt is considered not recourse debt under the following circumstances:
– A member of the LLC or person related to the applicable member guarantees or makes a loan to the LLC;
– Separate state law obligations to a member(s) exists (a member is liable for the recourse debts of a previous partnership);
– The debts falls under the interest guarantee rule of Regulations Section 1.752-2(e) or the property pledge rules of Regulation Section 1.752-2(h); or,
– The anti-abuse rule applies under Regulation Section 1.752-2(j).
When analyzing a partner’s share of partnership liability, the 752 Regulations first consider whether the debt is recourse debt or nonrecourse debt. Under Regulation Section 1752-2 a debt is recourse to a member of an LLC if that member (partner) bears the risk of economic loss for the applicable liability. The debt is nonrecourse if no member or partner bears the risk of economic loss. If partner has an obligation to make a contribution to the partnership or to pay a creditor upon liquidation of the partnership, the partner would bear the risk of economic loss to the extent of the obligation. For example, if a partner guaranteed the partnership’s nonrecourse liability, such partner would have an obligation upon the constructive liquidation of the partnership and bear the economic risk. Therefore, such liability would be a recourse debt to the partner. Moreover, if the partner acted as lender, and loaned money to the partnership as a nonrecourse liability to the partnership, such partner would be considered to bear the economic risk of the loan.
Under the 752 Regulations, the owner of a disregarded entity is treated as bearing the economic risk for obligations of the disregarded entity, to the extent of the disregarded entity’s net value on the date the partnership determines the partner’s share of the liability.
A tax attorney and business attorney at The McGuire Law Firm can assist you regarding partnership debt, basis, formation, structure, operating agreements, taxation issues, allocable shares to partners, transfer or sale of partnership interests and other partnership issues.
Contact The McGuire Law Firm and schedule a free consultation with a tax attorney in Denver or Golden.