FSA provides favorable guidance on liability allocation in partnership division.

• Author: Tapajna, Joseph J.
• Position: Partners & Partnerships - IRS Field Service Advice

In FSA 200131013, a partnership (Upper-Tier I) owned an interest in a lower-tier partnership (LTP) that had incurred debt. Upper-Tier I had taken nonrecourse deductions. It transferred part of its interest in LTP to another partnership (Upper-Tier II) that had the same ownership structure. After some debt restructuring, LTP allocated most of its debt to Upper-Tier II. The FSA concluded that, under Sec. 752(b) or 731, any debt shifting from Upper-Tier I to Upper-Tier II should not create gain for Upper-Tier I partners, because each partnership had identical ownership structures. The IRS respected Upper-Tier I and Upper-Tier II as separate partnerships, creating separate partnership interests with separate tax basis.

The rationale for the conclusion on the debt-shift issue seemed to be based on the Service's treatment of Upper-Tier I's transfer of the LTP interest as a division of Upper-Tier I. The IRS also indicated that the division of...