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5(a), Income Tax Regs. Section 1.752-1(a)(1), Income Tax Regs.,
defines a partnership liability as a recourse liability “to the
extent that any partner or related person bears the economic risk
of loss for that liability under � 1.752-2.” Section 1.752-2,
Income Tax Regs., provides the test for determining whether a
partner or related person bears the economic risk of loss. The
determination to be made is whether, if the partnership were
constructively liquidated, the partner or related person would be
obligated to make a payment when the liability became due and
payable. Sec. 1.752-2(b)(1), Income Tax Regs.
In a constructive liquidation, the regulations provide that
the following events are deemed to occur:
(i) All of the partnership’s liabilities become payable
in full;
(ii) With the exception of property contributed to
secure a partnership liability (see � 1.752-2(h)(2)), all of
the partnership’s assets, including cash, have a value of
zero;
(iii) The partnership disposes of all of its property
in a fully taxable transaction for no consideration (except
relief from liabilities for which the creditor’s right to
repayment is limited solely to one or more assets of the
partnership);
(iv) All items of income, gain, loss, or deduction are
allocated among the partners; and
(v) The partnership liquidates.
Sec. 1.752-2(b)(1)(i)-(v), Income Tax Regs.
In a constructive liquidation, the determination of which
partner or related person has an obligation to make a payment is
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Last modified: May 25, 2011